Monetary policy strategy and the behaviour of exchange rates : an empirical investigation
This thesis studies several aspects of the strategy which central banks follow in implementing monetary policy and its implications for the behaviour of exchange rates. The first chapter provides an introduction to the thesis and a review of the relevant literature. The following two chapters analyse the effects of information releases on the high frequency behaviour of the DEM/USD exchange rate, and investigate how these effects are related to the central banks' policy decisions and their strategy for disclosing information to the market. Chapter 2 studies the effects of monetary policy signals released by the Deutsche Bundesbank and the US Federal Reserve, showing that they have a strong impact on exchange rates, and that these effects depend on the channel used to release the policy information, and on when the information is released. Chapter 3 extends this analysis by examining the reaction to publicly announced macroeconomic information emanating from Germany and the US, and associates this reaction with market expectations regarding future monetary policy decisions and the timing of the announcement of those decisions. Alternative monetary policy frameworks and their implication for the behaviour of exchange rates are the topic of the following three chapters. Chapter 4 examines the policy framework in 44 developing countries, covering topics such as the choice of price stability as the objective for monetary policy, the potential conflicts between achieving this objective and other functions of the central bank (in particular the maintenance of financial stability), and central bank independence. Chapter 5 analyses the experience of seven countries that have adopted a policy strategy centered on inflation targets, and investigates how this affected the behaviour of the central banks. Chapter 6 investigates the implications of the strategies analysed in the previous chapters for the stability of financial markets, using price data for several financial assets from a panel of eighteen OECD countries. Finally, Chapter 7 summarises the conclusions of the thesis and provides suggestions for further work.