Journal of
International
Money
Journal of International Money and Finance
anc| Finance
24 (2005) 343-361
^^^^=^^^^
www.elsevier.com/locate/econbase
Talking heads: the effects of
ECB statements on the euro–dollar
exchange rate
David-Jan Jansena,*, Jakob De Haanb,c
aDe Nederlandsche Bank, Research
Division, P.O. Box 98, 1000 AB Amsterdam,
The Netherlands bDepartment of Economics,
University of Groningen, P.O. Box 800, 9700 AV Groningen,
The Netherlands cCESifo,
Munich, Germany
Abstract
This paper studies the reaction of the conditional mean and volatility of the euro-dollar
exchange rate to statements by European Central Bank and national central bank officials. We
focus on comments on monetary policy and the external value of the euro. We find that the
Bundesbank has dominated the news coverage. We conclude that ECB statements have mainly
influenced conditional volatility. In some cases there are effects of statements on the conditional
mean of the euro-dollar exchange rate. Efforts to talk up the euro have generally not been
successful. There is also evidence of asymmetric reactions to news. © 2004 Elsevier Ltd. All rights
reserved.
JEL classification: E50; F31
Keywords: ECB; Exchange rates; Euro; News approach; EGARCH
* Corresponding author. Tel.: +31 20 5243170; fax: +31 20 5242529.
E-mail address: d.jansen@dnb.nl (D. Jansen).
0261-5606/$ - see front matter © 2004 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jimonfin.2004.12.009
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D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343–361
1. Introduction
Currency markets are continuously flooded with information. In spite of intensive
research, the adjustment of exchange rates to this stream of information is still not fully
understood. Previous research on the reaction of exchange rates to news has mainly
studied the adjustment to announcements of new macroeconomic information. There is,
however, hardly any research explicitly analyzing the impact of statements by central
bank officials, the study by Fatum and Hutchison (2002) being one exception. Still, it is
likely that monetary policy has an influence on exchange rates, especially in the short
run. The central bank can change interest rates and intervene in foreign exchange
markets. Central bankers often also try to influence exchange rates directly by their
comments.
This paper studies the effects of statements made by European Central Bank (ECB)
and national central bank officials on the conditional mean and volatility of the euro–
dollar exchange rate during the first years of the European Economic and Monetary
Union (EMU). During this turbulent period, the depreciation of the euro caused great
problems for the ECB. Before its introduction, the euro was widely expected to be a
strong currency. Some even hoped (or feared) that the euro would compete with the
dollar in its role of most important international currency (see Eijffinger and De Haan
(2000) for a discussion).1 As the new currency was an important symbol for the EMU, its
decline led some observers to question the overall success of the EMU. Moreover, the
strong depreciation of the euro was a serious threat to price stability in the euro area. In
the end, the ECB reacted by intervening in the foreign exchange market. The success of
these interventions is under debate.2 Apart from interventions, the ECB has been very
active to support the euro verbally (a strategy known as talking up the currency). ECB
officials have often expressed the view that the euro was undervalued during the period
under consideration.
This paper investigates whether ECB statements have affected the euro–dollar
exchange rate. Firstly, we test whether efforts to talk up the euro have been successful.
Secondly, we test whether statements on monetary policy have fed through into the euro–
dollar exchange rate. For example, have comments indicating higher interest rates led to
changes in the exchange rate? Thirdly, we study whether statements have had an impact
on the conditional volatility of the exchange rate. We follow the so-called news approach
which rests on two assumptions (see e.g. De Grauwe et al. (1993)): the exchange rate is
modeled as an asset price and expectations
1
The exchange rate regime may also affect other financial markets. See, for instance, Cheung and
Westermann (2001) who report that even though the introduction of the euro did not affect the
relationship between German and US equity markets, the volatility of the German stock index has fallen
significantly since the introduction of the euro.
2
Whereas many observers question the effectiveness of interventions, Fatum and Hutchison (2002)
claim that the first of four ECB interventions had some success. See also Frenkel et al. (2001). See Sarno
and Taylor (2001) for a review of the literature on foreign exchange interventions. A recent study finding
support for the effectiveness of interventions is Fatum and Hutchison (2003). According to the survey by
Cheung and Chinn (2001), traders in currency markets think that interventions increase volatility. They do
not consider central bank interventions very successful.
D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343–361
345
are formed rationally. These assumptions imply that only unexpected information (or
news) influences the exchange rate as all currently available information is already
reflected in its current price. We use an EGARCH specification that allows us to test for
possible effects on the conditional mean as well as on volatility. Even though news is
found to be rapidly incorporated into exchange rates (see, for example, Cheung and
Chinn (2001) who find that currency traders believe that the bulk of the adjustment takes
place even within just 1 minute after the release of new information), we use daily
observations like Fatum and Hutchison (2002) and Galati and Ho (2003). This is
justified, as we are mainly interested in the effectiveness of statements of ECB officials.
If the effects of talking up the currency can only be observed using higher frequency
data, ECB statements cannot be considered a very powerful instrument to influence
developments in the foreign exchange market.
We use statements of European central bankers - including statements of officials of
national central banks in the euro area - as reported by the Bloomberg News Service. We
find that statements of Bundesbank officials outnumber those of other central bankers.
Our results indicate that ECB statements have had a larger impact on the conditional
volatility than on the conditional mean of the exchange rate. Efforts of the ECB to talk up
the currency have generally not been successful during the period under investigation.
Our results also indicate that there has been an asymmetric reaction to news. For
example, comments indicating interest rate rises cause the exchange rate to move,
whereas comments pointing towards lower interest rates do not.
The remainder of the paper is structured as follows. Section 2 surveys the literature on
the relationship between news and the exchange rate. Section 3 discusses our
methodology and the data used, while Section 4 describes the statements in detail.
Section 5 presents the results. Section 6 offers our conclusions.
2. News and the exchange rate: a selective survey
2.1. The news approach
If currency markets are efficient, only unexpected information (news) has an effect on
the exchange rate. The application of the news approach to exchange rates has a history
going at least as far back as Frenkel (1981). The conceptual idea behind the news
approach is very straightforward and may be represented by Eq. (1):
Rt = a + b1 {Xnt — Xf) +b2Zt + et
(1)
where Rt denotes the exchange rate return, defined as the first difference of the log of the
exchange rate. Xn is a matrix with new realizations of macroeconomic variables and Xet
is a matrix with expectations. The difference between realizations and expectations is
then defined as news. Zt is a matrix with control variables and a is a constant. Table 1
presents a selection of the numerous papers that have studied
3
Rigobon and Sack (2002) and Evans and Lyons (2003) advocate the use of a new approach, based on state
dependent heteroscedasticity.
Table 1
The news approach to exchange rates: selected papers
News items
Hakkio and Pearce (1985)
Ito and Roley (1987)
Goodhart et al. (1993)
Ederington and Lee (1993)
DeGenarro and Shrieves (1997)
Almeida et al. (1998)
Andersen and Bollerslev (1998)
Fatum and Hutchison (2002)
Tivegna (2002)
Andersen et al. (2003)
Galati and Ho (2003)
Macroeconomic announcements
Macroeconomic announcements
Two specific events
Scheduled macroeconomic announcements
Macroeconomic news, economic policy
news, interest rate reports
Macroeconomic announcements
Scheduled macroeconomic announcements
Statements and rumors on ECB intervention
Macroeconomic announcements, events,
opinions, statements
Macroeconomic announcements
Macroeconomic announcements
Measure
Xtn-Xte
Xtn-Xte
Dummies
Dummies
Number of news
items
Xnt-Xte
Dummies
Dummies
Xnt — Xet and dummies
Xnt — Xte and dummies
Xtn-Xte
Estimation
OLS with 3 observations per day
OLS with 4 observations per day
OLS and GARCH-M using
continuous data OLS using 5 min
returns ARMA using 10 min returns
OLS using 5 min returns
Volatility modeling using 5 min returns
OLS using daily data
Multivariate GARCH using 2
observations per day
ARMA using 5 min returns
ARMA using daily observations
D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343–361
347
the relationship between news and the exchange rates. The table highlights some of the
choices researchers have made with respect to the news that was studied, how news was
measured and how the estimation was done.
2.2. Which news is studied?
Most papers in this field study reactions to macroeconomic announcements. Hakkio
and Pearce (1985), for example, study short-run responses of spot exchange rates to three
categories of economic announcements: money growth, inflation and real activity. They
find that the exchange rate only reacts to unexpected changes in the money stock. 4 Ito
and Roley (1987) study reactions of the yen–dollar exchange rate to news from Japan and
the US. These authors find that the yen–dollar exchange rate was mainly driven by news
from the US.
Improved data availability enabled researchers to use high frequency data in order to
separate the effects of news from the effects of other factors influencing the exchange
rate. For example, Ederington and Lee (1993) examine the impact of 19 types of
scheduled macroeconomic news announcements on the volatility of the dollar–German
mark exchange rate. They find that the volatility of the exchange rate is influenced by
announcements on merchandise trade, employment, retail sales, the producer price index
and GNP. Goodhart et al. (1993) focus on two particular events: a release of US trade
figures and an interest rise in the UK. These authors conclude that these events
significantly change the time-series behavior of the exchange rate.
DeGenarro and Shrieves (1997) and Tivegna (2002) study macroeconomic
announcements and other factors. DeGenarro and Shrieves (1997) distinguish three
categories of news: macroeconomic news, economic policy news and interest rate
reports. The last two categories contain unscheduled news. They use quote arrival as a
proxy for market activity and the number of news headlines in the Reuters news service
as a proxy for news. These authors conclude that both private information and news are
important determinants of exchange rate volatility. Tivegna (2002) studies both
scheduled (mostly quantitative) and non-scheduled (mostly qualitative) news items. He
concludes that statements by policy makers are an important market mover for exchange
rates.
The seminal paper by Andersen and Bollerslev (1998) has been very important in
bringing together three factors that influence the volatility of exchange rates. The first
category is calendar effects, which can be split into intraday effects, weekly effects,
holiday effects and time change effects. The second category is macroeco-nomic
announcements. The final category is interdaily volatility dependencies or ARCH effects
(also see Hsieh (1988) and Hsieh (1989)). One important conclusion is that the
announcement effects are of secondary importance in explaining overall volatility.
Announcements have significant effects shortly after they were made, but they explain
less of the volatility than the other two factors. However, Andersen and
For a similar analysis, see Doukas and Rahman (1986) and Doukas and Melhem (1986).
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D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343–361
Bollerslev (1998) conclude the effect of the announcements is large. Almeida et al.
(1998) support this conclusion. They study the reaction of the German mark– dollar
exchange rate to macroeconomic announcements using high frequency data. They
conclude that after 3 hours most of the effect from the announcement has disappeared.
The effects are dwarfed by other events at lower frequencies.
The study by Andersen et al. (2003) is similar to Andersen and Bollerslev (1998) in
scope and modeling approach. Andersen et al. (2003) characterize the conditional mean
of the spot rate of the US dollar against five other currencies. They find that, in general,
news has a statistically significant effect on the exchange rate. The adjustment of the
conditional mean in reaction to news is very quick, whereas the adjustment in volatility is
more gradual. There is also evidence that the sign of the news matters for the response.
Negative surprises have greater impact than positive surprises.
2.3. Studies on the euro–dollar exchange rate
Understandably, research on the euro–dollar exchange rate is still underrepre-sented
in the literature. Two recent papers are Galati and Ho (2003) and Fatum and Hutchison
(2002). Galati and Ho (2003) investigate the relationship between scheduled
macroeconomic news and the daily change in the euro–dollar rate, focusing on the
impact of US and European news announcements during the first two years of EMU.
They conclude that the unexpected part of macroeconomic news announcements can
explain up till 10% of the variation in the euro–dollar rate. There is also evidence that the
reaction to news is asymmetric: good news on the euro area has been ignored, while bad
news has had an influence.
Fatum and Hutchison (2002) study the effects of ECB intervention and interventionrelated news on the euro–dollar exchange rate. These authors use a regression approach
to determine which news variables have had effect on the euro and use an event study
methodology to assess whether the ECB interventions have been successful. They use
four categories of news: rumors of intervention by the ECB, statements by officials in
support of the euro, statements by officials not supportive of the euro and reports of
actual intervention. Rumors on intervention have a positive effect on the exchange rate
and statements not supportive of the euro have a negative effect on the euro–dollar
exchange rate. Interestingly, Fatum and Hutchison (2002) find that only the negative
statements have persistent effects.
3. Methodology
3.1. Modeling strategy
We test whether statements by central bank officials contain news affecting the
conditional mean and the conditional volatility of the euro–dollar exchange rate.
Following the above mentioned literature, we model the first difference of the log of the
exchange rate series, using AR-terms and control variables. We also take
D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343–361
349
clustered volatility into account. Given the qualitative nature of our data, we measure
news by using dummies.5 We use the EGARCH model proposed by Nelson (1991), both
because EGARCH allows us to take asymmetric effects on volatility into account and
because nonnegativity constraints in the variance equation were violated using GARCH.
The model is specified as follows:
n
j
Rt = b0+ \~)biRt-i + 2_\bsiXst-i"*"bwDw + et, e t ~ N(0,ht)
i=1
2)
i=0
j
d3 e- + J2 dsiXst-i + dw Dw
log ht = d0 + d1 log ht-1 + d2 -— +
i=0
h t-1
where Rt represents the daily change in the natural
logarithm of the exchange rate and Xs contains the dummies that represent the ECB
statements. The variables in Xs enter both in the mean and variance equation. The mean
Eq. (2) has n autoregressive terms in the dependent variable and has dummies for
weekdays, denoted as Dw, as control variables.6 The error term is assumed to have a
conditional normal distribution with a zero mean and a conditional variance ht which
follows an EGARCH (1,1) process.7 The weekday dummies also enter the variance
equation (as in Hsieh (1988) and Hsieh (1989)). To choose between alternative
specifications, we use both the Akaike information criterion and the Schwartz criterion,
following a general to specific approach.
3.2. Constructing dummies to measure news
As noted, we use dummies to measure news. Firstly, we use binary dummies to test
for effects whenever a central banker makes a statement or when a certain topic is
commented on. However, as Tivegna (2002) argues, this could incorrectly lead to
nonsignificant results as the effects of statements with contrasting contents may cancel
out. Therefore, he uses ternary variables that record whether a statement has an expected
positive, neutral or negative effect on the exchange rate. Galati and Ho (2003) follow a
similar approach. We partly follow this suggestion and also use dummies that measure
the content of a statement. However, we do not completely follow the method suggested
by Tivegna (2002). Firstly, when using ternary dummies, the interpretation of the
coefficients is not straightforward. Therefore, we prefer to construct three dummies per
category of statements. An additional benefit
5
Following the news approach, we would have to contrast the ECB statements with market
expectations. As the statements are mainly in qualitative terms, there is no obvious proxy we can use.
6
We also estimated this model using interest differentials, stock returns and dummies for ECB rate
decisions and ECB interventions as additional control variables. This did not influence our basic results.
7
In general, our results are robust to using higher order of ARCH/GARCH. Since exchange rate data
is often characterized by fat tails, we have checked our results using a conditional t-distribution and
a conditional generalized error distribution instead of the conditional normal distribution. In general, our
results are robust.
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D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343–361
is that we can study whether there have been asymmetric reactions to news. Secondly,
we find it too subjective to assign, a priori, positive, neutral or negative values to
statements based on their expected effect on the exchange rate. Therefore, we start with a
more neutral approach and record whether an ECB official states that a macroeconomic
variable, for example inflation, will go up, down or remain the same.
We record the following basic characteristics of each statement: the day on which the
statement was made, the person who made the statement, the topic of the statement and
the content of the statement. Firstly, we construct (0,1) dummies that measure whether
individual central bankers or different groups of ECB officials made a statement. Then,
we study topics and content.8 We identify eight categories of statements that we expect to
be relevant for the exchange rate (see Table 2). There are two main categories: monetary
policy and the external value of the euro. There are five subcategories in the monetary
policy category. First of all, there are statements on interest rates in the euro area. The
remaining sub-categories relate to the two pillar monetary policy strategy of the ECB.
Firstly, there are statements on money growth in the euro area (the former first pillar).
Secondly, there are statements on economic growth, inflation and the effects of the euro
on inflation (the former second pillar).
For statements in the monetary policy category, we record whether according to the
ECB official a variable, say interest rates, is expected to go up, or down, or remain
stable. Why would these statements affect the exchange rate? With respect to the
conditional mean, economic theory suggests a few possible outcomes. A statement
suggesting higher interest rates may, for instance, affect the exchange rate via three
possible channels (see also Harris and Zabka (1995)): an investor channel, an inflation
channel and a growth channel. According to the first channel higher interest rates make
buying European securities more attractive which will induce demand for euros. The
second channel works through prices. If a central bank raises the interest rate, this will
put downward pressure on inflation. Assuming that purchasing power parity holds, this
will lead to an appreciating euro. The last channel predicts a negative relationship
between statements on higher interest rate and the exchange rate: higher interest rates
hamper investments and thus hamper growth, leading to a weaker currency.
The second main category that we distinguish are statements on the external value of
the euro. The first sub-category under this heading contains statements expressing beliefs
on the future direction of the exchange rate. In Section 4 we show that during the period
under investigation ECB officials repeatedly expressed the view that the euro had
potential to appreciate. Section 5 tests whether this strategy of talking up the euro has
been successful. In addition, we test whether the conditional variance of the euro–dollar
series has been affected by these statements.
8
We tried to construct variables that combine the results from dummies for central bankers with those from
the content of the statements. However, combining these two perspectives results in variables with very low
variation and few data-points (i.e. a lot of zeros out of a possible 880). Although this route is certainly very
interesting, our data is not rich enough to explore it further.
D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343–361
351
Table 2
Categories of ECB Statements
Category
Contains statements on
(1) Monetary policy
Interest rates
M3
Economic growth
Inflation
Pass-through
ECB interest rates
Growth of money supply
Real GDP growth in the euro area
Inflation in the euro area
How the euro exchange rate will affect inflation
(2) The euro
Future value of euro
No target versus inflation
Intervention
Expectations on the external value of the euro
The euro in the monetary policy strategy
The possibility of intervention
The second sub-category contains statements trying to explain the position of the euro
in the ECB monetary policy strategy. There have been many of these statements in the
sample period as the ECB has intensively communicated about its monetary policy
strategy in recent years. Time and again, ECB officials stressed that the external value of
the euro was not an objective for monetary policy. Nevertheless, the extensive
depreciation of the euro, which affected inflation in the euro area, forced them to take the
euro–dollar rate into account when making monetary policy decisions. We characterize
statements that stress that the exchange rate is not a target as negative, i.e. leading to a
depreciating euro. We consider statements that stress the possible effect on inflation as
positive. This no target/inflation problem may have led to confusion in currency markets,
thus potentially increasing volatility. Finally, there are statements on the possibility of an
intervention in the currency market. During the period under consideration, there has
been a lot of speculation on possible intervention. In a similar vein as Fatum and
Hutchison (2003), we test how markets have reacted to this news. Statements that
suggest the possibility of intervention are expected to lead to an appreciating euro,
whereas statements that deny possible intervention may lead to (further) depreciations. In
addition, this type of statement is also likely to have an effect on volatility.
Finally, note that there is a difference in the number of observations between the
statements series and the exchange rate series. There is only one data point per day for
the exchange rate series. However, there can be more than one statement per day. In
addition, statements can be made during the weekend when trading activity is generally
low. To synchronize the series, we add the statements made during the weekend to the
scores for Monday. We also added up the different scores if we found more than one
observations per trading day.
3.3. Data sources
The sample period ranges from 4 January 1999 until 17 May 2002. This amounts to a
total of 881 trading days. The data set with ECB statements was collected from the
Bloomberg News Service. This was done by scanning the headlines for keywords like
ECB or names of ECB officials. We selected some 930 news reports in which
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D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343–361
ECB statements are reported. The criterion for including a statement is that it has to refer
to the entire euro area. Statements on developments in individual countries are not
included. We focus on unexpected statements, because we expect to find the greatest
effects in these cases. For this reason, the monthly press conferences are not included in
our data set. The exchange rate series is taken from Datastream. The exchange rates are
New York noon spot rates (dollars per euro). This means that the cut-off point for a
trading day is 18.00 CET.9
4. Description of the statement dummies
4.1. Central bankers
Table 3 displays the statement dummies for three groups of central bankers and some
selected individuals. National central bank presidents made statements on 336 trading
days compared to 256 statements for members of the Executive Board of the ECB. We
find 82 statements of Bundesbank officials (excluding the president of the German
central bank). For no other European central bank do we find such a large amount of
statements by its officials.10
Table 3 also shows that the Bundesbank president has made more comments than any
other ECB official. We find statements by either Tietmeyer or Welteke for 179 trading
days, compared to 92 for Duisenberg and 95 for Trichet. Together with the 82 statements
of other Bundesbank officials, the total number of statements by the German central
bankers is even higher than that of the Executive Board of the ECB. There are two
possible explanations for this. First, financial markets may still attach greater importance
to the Bundesbank than to the ECB. The ECB is a new institution that has not yet
established a firm reputation. In contrast, the German central bank is a venerable
institution that has proven its capability in monetary policy-making over the years.
Financial markets do not yet know how to judge the new situation and may still attach
great importance to Bundesbank statements for this reason. However, this explanation
assumes that Bloomberg selects news in such a way, that the statements of Bundesbank
officials receive most attention. Since it is Bloomberg’s business to bring as much news
as possible, this is not very likely.
Alternatively, it may be argued that the Bundesbank has not yet learnt to cope with its
new role within the European System of Central Banks. For years, the Bundesbank has
dominated monetary policy in Europe. All this has changed, however, and the
Bundesbank had to step back in favor of the ECB. The fact that Bundesbank officials
communicated so intensively to financial markets may reflect their difficulty in accepting
this new situation.
9
Except during two weeks per year when US and European D.S.T. are not synchronized. The cut-off
point is then 19.00 C.E.T.
10
There is quite some variation in Bundesbank statements. Bundesbank officials commented on most
of the topics mentioned in Table 2. Moreover, the message in their comments was not uniform, as we
discuss in Jansen and De Haan (2004).
D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343–361
353
Table 3
Statement dummies for central bankers
Total number of statements
Groups
Executive Board
National central bank presidents
Bundesbank officials (excluding president)
256
336
82
Total
674
Individuals Duisenberg
Bundesbank president
Tietmeyera
Weltekeb
Trichet
92
179
24
155
95
Note: the numbers in this table show the number of trading days on which statements were made. a 4
January 1999 until 31 August 1999. b 1 September 1999 until 17 May 2002.
4.2. Content of statements
Table 4 presents the number of ECB comments and their content regarding the topics
as described in Table 2. Table 4 shows the number of trading days with statements of a
particular category. For example, there were neutral statements on interest rates on 173
out of the 881 trading days, while there were indications for higher interest rates on 36
trading days and indications for lower rates on 12 trading days.
It follows from Table 4 that the number of statements on money growth is relatively
small compared to those on the second pillar of the monetary policy strategy. The
statements on economic growth generally indicate that the outlook for
Table 4
The content of the ECB statements
Monetary policy
Interest rates
M3
Economic growth
Inflation
Pass-through
The euro
Future value of euro
No target versus inflation
Intervention
Up
Neutral
Down
Total
36
27
194
79
51
173
27
25
111
39
12
29
35
90
10
221
83
254
280
100
Positive
Neutral
Negative
Total
172
112
17
6
24
22
2
42
18
180
178
57
Note: The numbers in this table show the number of trading days on which particular statements were made.
Totals for Tables 3 and 4 do not add up, because one news item may report comments on more than one
category.
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D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343–361
growth is good, whereas the statements on inflation are more balanced. One reason could
be that statements on inflation may sooner lead to speculation on interest rate changes.
This may cause ECB officials to be more careful when talking about inflation. Finally,
there are statements on the pass-through of the depreciation of the euro into higher
inflation on 100 trading days. Most of these statements (51) indicate higher risks for
inflation.
There are many statements referring to the second main category. Of special interest is
the sub-category with statements on the future value of the euro. ECB officials made
positive statements on the euro on 172 trading days. Only two statements were negative
and six were neutral, reflecting the efforts of the ECB to talk up the euro. The subcategory on the no target/inflation trade-off contains 178 statements. This large number
of statements indicates that the ECB has made great efforts to explain the role of the euro
in its monetary policy strategy. The majority of statements stress the possible effects of a
depreciation of the euro on inflation in the Euro-zone. Finally, we recorded statements on
(possible) intervention for 57 trading days. Of these statements 17 indicated that
interventions could take place, 22 were neutral and 18 lowered the probability of
intervention by the ECB.
5. Results: did ECB statements contain news?
5.1. ECB statements: groups and individuals
As a benchmark, we estimate Eqs. (2) and (3) initially without the dummies for the
ECB statements. Using the Akaike and Schwartz criteria, we find that one autoregressive
term in the mean equation is sufficient. The weekday dummies in the mean equation are
always insignificant, so they are excluded in the remainder of the analysis. In the
variance equation, we find a lower conditional variance on the Monday and Friday.11
Starting from our benchmark model, we proceed to add statements dummies to our
model. Firstly, we study whether there are effects from statements by different groups of
ECB officials. The second column of Table 5 presents the regression results for the case
in which all ECB officials are included. The number of lags for the statements dummies
have been chosen on the basis of the Akaike information criterion and the Schwartz
criterion, starting with a maximum of 10 lags. We do not find any significant effect of
statements of ECB officials on the mean of the exchange rate. However, there is a
significant increase in volatility after the day a statement was made. Volatility (measured
by the conditional standard deviation) is approximately 12% higher in these cases. Also,
statements by Executive Board members increase volatility (as reported in column 3 of
Table 5). The coefficient of the lagged value of the statement dummy is 0.20, indicating,
once again, an increase
11
Given the exponential specification a coefficient in the variance equation that is smaller (larger) than zero
indicates lower (higher) variance.
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355
Table 5
Results for groups of ECB officials
(1)
Benchmark
(no dummies)
(2)
All
(3)
Executive
Board
(4)
Bundesbank
officials
(excl. President)
Mean equation
Constant
AR(1)
Statements
Statement (1st lag)
-0.00
0.03
–
–
-0.00
0.03
–
–
-0.00*
0.03
–
–
-0.00*
0.04
0.0017***
—0.0012*
Variance equation
Constant
Statements
Statements (1st lag)
d1
d2
d3
Monday
Friday
Akaike IC
-10.2***
–
–
-0.05
-0.18*
0.01
-0.50***
-0.27*
-7.295
—8.47***
-0.04
0.22*
-0.02
-0.16*
-0.0
-0.51***
-0.27*
-7.296
—9 75***
0.08
0.20
0.01
-0.17*
0.01
-0.57***
-0.26
-7.296
-10.15***
–
–
-0.04
-0.19*
0.00
-0.53***
-0.27*
-7.301
Note: This table shows the estimation results for Eqs. (2) and (3). In column (1) no statement dummies are
included. In column (2) statements by all ECB officials are taken up. In column (3) only statements by
members of the Executive Board are included, while in column (4) statements by officials of the German
central bank (excl. the president of the Bundesbank) are shown. Bollerslev–Woolridge robust standard errors
and covariance are used. Reported results assume a conditional normal error distribution. */**/*** denotes
significance at the 10/5/1% level, respectively.
in volatility of 11%. However, the coefficient of the statement dummy is only marginally
significant in this case ( p Z 0.11).
Interestingly, statements by Bundesbank officials (excluding the president) have no
effect on volatility, but there are temporary and off-setting effects on the conditional
mean. Column (4) of Table 5 shows that there is an appreciation of 0.17% on the trading
day itself and a subsequent depreciation of 0.12% on the day thereafter. According to a
Wald test, the total effect is not significantly different from zero.
Our next step is to focus on individual central bankers. Therefore, we estimate Eqs.
(2) and (3) using dummies for all 18 members of the ECB Governing Council. As before,
we select our preferred specification by evaluating the Akaike and Schwartz criteria.
Statements by Duisenberg, the Bundesbank president, and Trichet turn out to be of
importance. Table 6 reports the results. We find that statements affect the conditional
mean, but not the conditional variance. Statements by Duisenberg and the Bundesbank
president coincide with a depreciating euro, whereas statements by Trichet coincide with
an appreciating euro.12 There is no evident explanation for this. The data, for example,
does not show that these three central bankers made different sorts of comments (see
Jansen and De Haan (2004)).
12
However, the dummy for statements by Duisenberg is only marginally significant under the assumption of a
generalized error distribution ( p Z 0.16).
356
D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343-361
Table 6
Results for Duisenberg, Bundesbank president and Trichet
(1)
Mean equation
Constant
AR(1)
Duisenberg
Bundesbank president
Trichet
Variance equation
Constant
<51
<52
<53
Monday
Friday
Akaike IC
—0.00
0.03
—0.0013**
—0.0012**
0.0014**
—10.32***
-0.06
-0.17
0.00
—0.58***
—0.25
—7.304
Note: This table shows results for Eqs. (2) and (3) assuming a conditional normal distribution with BollerslevWoolridge robust standard errors and covariance. */**/*** denotes significance at the 10/5/1% level,
respectively.
5.2. Looking at topics
We now turn to the topics of the statements. First, we use occurrence dummies to test
for effects of statements, regardless of the direction in which a variable was said to
develop. We analyze two cases. In the first regression we include dummies for
statements on interest rates and the euro category (see bottom half of Table 2). In the
second regression we have replaced the dummy for statements on interest rates by
dummies for statements on the first and second pillar of the monetary policy strategy of
the ECB. We present two regressions because of a possible simultaneity problem:
statements on inflation and growth may influence the exchange rate as well as trigger
statements on interest rates. By estimating two equations, we try to separate these effects.
The results are reported in Table 7.
In the first regression, none of the statement dummies is significant in the mean
equation (column 1 of Table 7). It follows that the ECB has not been successful in
talking up the euro. However, statements on the future value of the euro have a
significant effect in the variance equation. Volatility is about 15% lower on the day that
statements on the euro are made. However, the day after the statement is made volatility
increases 25%. This may be explained by the fact that heterogeneous agents start
delivering comments after the statement, thus enlarging market uncertainty.
The results for our second regression are comparable to those of the first. For
intervention, however, we now find effects for the lagged value of the intervention
dummy. This also means that over the two day period, the effect is significantly
We thank the referee for this suggestion.
D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343-361
357
Table 7
Results using dummies for content of statements
(1)
Mean equation
Constant
AR(1)
Pass-through
Intervention
Intervention(1st lag)
Variance equation
Constant
Pass-through
Future euro
Future euro (1st lag)
No target versus inflation
51
0.42**
<52
<53
Monday
Friday
Akaike IC
(2)
—0.00
0.02
-
—0.00
0.03
—0.0018**
—0.0005
0.0020**
—5.66***
—0.28*
0.47***
-
—6.81***
0.53***
—0.34**
0.48***
—0.26*
-0.12
0.03
0.29*
-0.15*
0.01
—0.65***
—7.306
—0.57***
—0.23
—7.323
Note: This table shows results for Eqs. (2) and (3). Column (1) reports the results for the specification with
dummies for statements on interest rates and dummies for statements on the external value of the euro,
intervention and the no target/inflation trade-off. Column (2) reports the results if the dummy for statements on
interest rates is replaced by dummies for statements on the two-pillar strategy of the ECB. Results are shown
for errors that have a conditional normal distribution. Bollerslev-Woolridge robust standard errors and
covariance are used. */**/*** denotes significance at the 10/5/1% level, respectively.
different from zero. This result is in line with the findings of Fatum and Hutchison
(2002). In addition, we find a small effect of statements on pass-through of changes in
the euro-dollar exchange rate into inflation (depreciation of 0.20%). Once again, we do
not find evidence that talking up the euro has been successful. Again, the coefficient of
the dummy for statements on the future potential of the euro is significant in the variance
equation. There is also evidence that statements on the trade-off between the euro as a
target and inflation have led to lower volatility.
5.3. Looking at content
Do the results change if we use dummies that measure the message contained in ECB
statements? As before, we use two regressions. Table 8 shows the results.
However, these authors have a dummy reflecting the presence of rumors on interventions, while our
dummy refers to statements of ECB officials on interventions, which may not be the same.
15
Our analysis assumes that the causality runs from news to changes in the exchange rate. There may be an
issue of reverse causality if central bankers react to currency market conditions. There is no evidence of this in
probit regressions of all ECB statements on the current and lagged (average) change in the euro-dollar
exchange rate. Finding causes for central bank communication may be a fruitful avenue for future research,
nonetheless.
358
D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343–361
Table 8
Taking the message in the statements into account
(1)
(2)
Mean equation
Constant
AR(1)
Higher rates (1st lag)
Higher M3 growth (1st lag)
Pass-through neutral
-0.00
0.03
-0.0027***
–
–
-0.00
0.03
–
-0.0028***
-0.0017**
Variance equation
Constant
Higher M3 growth
Higher inflation
Higher degree of pass-through
Stronger euro
Stronger euro(1st lag)
Higher chance of intervention
Higher chance of intervention(1st lag)
d1
d2
d3
Monday
Akaike IC
-5.84***
–
–
–
-0.36**
0.49***
0.62*
-0.68
0.41**
-0.13*
0.03
-0.61***
-7.313
-5.50***
-0.96***
0.41***
0.44**
-0.40**
0.58***
–
–
0.44***
-0.17**
0.02
—0 70***
-7.333
Note: This table shows results for Eqs. (2) and (3). Column (1) reports the results for the specification with
dummies for statements on interest rates and dummies for statements on the external value of the euro,
intervention and the no target/inflation trade-off. Column (2) reports the results if the dummy for statements on
interest rates is replaced by dummies for statements on the two-pillar strategy of the ECB. Results are reported
for error terms that follow a conditional normal distribution. Bollerslev–Woolridge robust standard errors and
covariance are used. */**/*** denotes significance at the 10/5/1% level, respectively.
Columns (1) and (2) show that, once again, there is no evidence that talking up the euro
has been successful. Furthermore, column (1) shows that statements indicating an interest
rate rise are followed by a depreciation of approximately 0.3% the next day. This
negative reaction may be explained by the negative effect of an interest rate rise on
economic growth. In the conditional variance equation we find that volatility was lower
on days during which positive statements on the euro were made. However, the next day
volatility was almost 30% higher. Statements raising the possibility of intervention lead
to higher volatility during the day, as may be expected, while the next day volatility is
lower.16
In the second regression we find significant coefficients in the mean equation for
money growth and pass-through. Comments on higher money growth lead to
16
The coefficient is marginally significant when using normally distributed errors: p Z 0.13. However, the
significance is higher when assuming a t-distribution ( p Z 0.08) or a generalized error distribution ( p Z 0.11).
D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343–361
359
a depreciation of about 0.3%. Neutral statements on pass-through coincide with a
depreciation of 0.17%. In addition, statements on money supply, inflation and passthrough enter the conditional variance equation. Statements on higher money growth lead
to lower volatility, whereas statements on higher inflation and a higher degree of passthrough of the exchange rate into inflation lead to higher volatility. The results for
statements belonging to the euro category are similar to those of the first regression. One
difference is that positive statements on intervention no longer lead to changes in
volatility.
Overall, we find evidence for asymmetric reactions to news as markets react differently to positive and negative statements on similar topics. For example, comments
indicating interest rate rises cause the exchange rate to move, whereas comments
pointing towards lower interest rates do not. This result is in line with the findings of
Galati and Ho (2003), Fatum and Hutchison (2002), and Andersen et al. (2003).
6. Conclusion
To what extent did ECB statements influence the euro–dollar exchange rate? We
show that effects of ECB statements on the conditional mean of the exchange rate, if any,
are comparatively small. Moreover, the effects are not persistent: statements rarely have
significant effects over the two day period after the statement. In contrast, ECB
statements have had considerable impact on the conditional volatility. Firstly, there is
evidence that for the ECB officials as a group volatility increases after policy statements
are made. Secondly, more statement dummies enter the variance equation than the mean
equation. Thirdly, effects on volatility may be quite large.
We conclude that central bankers should be careful with their comments, as long as
they perceive higher volatility as welfare decreasing. The implication may be that, in
order to secure this, communication should be more centralized. One way to achieve this
would be for national central banks to step back and let the ECB president handle the
communication to financial markets more efficiently.
We show that efforts of the ECB to talk up the euro have been without result.
Statements that were intended to bolster the external value of the euro did not lead to an
appreciation of the euro. Evidently, there was no reason for the market to react to these
statements. Importantly, these statements have led to higher volatility. From this
perspective, the advice to the ECB would be to not use this particular strategy again in
the future, as volatility may increase uncertainty. However, an interesting avenue for
future research is to examine the more recent experience with ECB verbal intervention
intended to talk the euro down, as there is tentative evidence that this strategy has been
more successful.
Some types of statements on monetary policy have had influence on the conditional
mean of the exchange rate. In particular, the results show a negative relationship between
statements on higher interest rates and the strength of the euro against the dollar. Finally,
there is evidence of asymmetric reactions to news. Markets respond differently to
positive or negative news from the same category.
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D. Jansen, J. De Haan / Journal of International Money and Finance 24 (2005) 343–361
Acknowledgements
The authors thank Elmer Sterken, Lex Hoogduin, Peter van Els and Peter Vlaar for
useful discussions. This paper benefited greatly from comments by Frank Heinemann,
Yin-Wong Cheung, Frank Westermann and other participants of the CESifo Area
Conference on Macro, Money and International Finance (Munich, 21– 22 February
2003). Comments from participants of the 6th European Workshop on EMU (University
of Crete, 25–31 August 2003) and the 8th International Conference on Macroeconomic
Analysis and International Finance (University of Crete, 27–29 May 2004) are also
gratefully acknowledged. Finally, the authors thank Ansgar Belke and an anonymous
referee for useful comments. We also thank Het Financieele Dagblad for giving us the
opportunity to use Bloomberg. All remaining errors are our own. The views in this article
do not necessarily coincide with those of De Nederlandsche Bank.
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