The relative size of New Zealand exchange rate and interest rate responses to news

Release date
01/09/2008
Reference
DP2008/12
Authors
Andrew Coleman; Özer Karagedikli
Published as
Coleman, Andrew and Özer Karagedikli (2012). ‘The relative size of exchange rate and interest rate responses to news: An empirical investigation’, The North American Journal of Economics and Finance, Elsevier, Volume 23(1), Pages 1-19, DOI: https://doi.org/10.1016/j.najef.2011.07.002.
This paper examines the relative size of the effects of New Zealand monetary policy and macroeconomic data surprises on the spot exchange rate, 2 and 5 year swap rate differentials, and the synthetic forward exchange rate schedule. We find that the spot exchange rate and 5 year swap rates respond by a similar magnitude to monetary surprises, implying there is little response of the forward exchange rate to this type of news. In contrast, the spot exchange rate responds by nearly three times as much as 5 year interest rates to CPI and GDP surprises, implying that forward rates appreciate to higher than expected CPI or GDP news. This is in contrast to standard theoretical models and US evidence. Lastly, we show that exchange rates but not interest rates respond to current account news. The implications of these results for monetary policy are considered.