Monetary Policy News and Exchange Rate Responses: Do Only Surprises Matter?

As before, none of the regression models using the sum of the expected and the unexpected
components as a single explanatory variable display any significant effects of a monetary policy change.
Again, this illustrates the importance of extracting the unexpected component from the actual change in
order to avoid arriving at wrong conclusions.

The relevant lead model results for the JPY/USD are summarized in Table 5. With the exception
of a marginally significant coefficient estimate for the k=14 lead model, the table shows that none of the
lead models are associated with significant effects of the unexpected component of a monetary policy
change. The analysis, therefore, suggests that the JPY/USD exchange rate market absorbs news quickly.

3.4 The GBP/USD Exchange Rate

The results of the analysis of the GBP/USD exchange rate responses are very similar to those based on the
other two exchange rates in our sample and the key findings are repeated. Tables 6 and 7 display these
findings.

The first two columns of Table 6 show that for both model specifications the b₁ coefficient is
insignificant while the b₂ coefficient is again positive and significant (at the 95 percent level). The
coefficient estimates imply that an unexpected one percentage point (one hundred basis points) change in
the target rate is associated with a 2.0 - 2.18 percent same-day change in the exchange rate (or an
unexpected 25 basis point change in the target rate is associated with a 0.5 percent same-day change in
the exchange rate).

The last two columns show, interestingly, that even without isolating the unexpected component
from the actual monetary policy change the regression analysis suggests that monetary policy changes
trigger a same-day exchange rate response. More interesting, however, is it to compare the magnitude of
the coefficient estimates associated with the actual change to the magnitude of the coefficient estimates
associated with the unexpected or surprise component of the change. The coefficient estimates stemming
from the model focusing on the announced policy change without isolating the surprise would imply that

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