The European Central Bank’s Monetary Policy Announcement Effect on the Exchange Rate in the Effective Lower Bound Era

By Raisa Khadija Muhtar, University of St. Andrews

Using a high-frequency event study of the European Central Bank’s (ECB) monetary policy announcements for both the “Press Release” event window and “Press Conference” event window, this paper observes an increasing sensitivity of exchange rate response to monetary policy announcements windows over the period of 2002 to 2019. This supports the view that the ECB has growing influence on the exchange rate in the Effective Lower Bound era. The multi-dimensional surprises identified in both conventional and unconventional monetary policy announcements have all resulted in exchange rate appreciations across all currency pairs by successfully increasing the market’s expectations of future monetary policy via driving up inflation expectations. Overall, the ECB’s communication of monetary policy decisions may be negating the intended effects of its monetary policy implementation to stimulate inflation, therefore impairing it from achieving its central mandate of maintaining price stability.

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