a one percentage point (one hundred basis points) change in the target rate is associated with a 0.82 - 0.95
percent same-day change in the exchange rate. This is less than half of the magnitude suggested by the
regressions using the Kuttner-decomposition and the isolated surprise component of the policy change. In
other words, our findings illustrate that using the actual change as a measure of the impact of a monetary
policy change will underestimate the importance of monetary policy (in the case of the GBP/USD
exchange rate) or even wrongfully reject any effects of monetary policy (in the case of the DEM/USD and
the JPY/USD exchange rates).
Table 7 shows the coefficient estimate associated with the unexpected component of the Fed
funds target rate changes for each of the first 15 GBP/USD exchange rate lead-models described in
equation (3). These results mimic the results for the DEM/USD exchange rate as none of the GBP/USD
lead models are associated with significant effects of the unexpected component of a monetary policy
change. This complete absence of delayed effects implies that the GBP/USD exchange rate market
absorbs news quickly.
3.5 Macroeconomic News
Consistent with Bonser-Neal and Tanner (1996), Galati, Melick and Micu (2005) and others, we find
evidence that surprises regarding macroeconomic news affect exchange rate fluctuations across all three
exchange rates in our sample. However, since we are using an event study approach in order to focus on
the impact of monetary policy changes (and not a time-series analysis), our regression models described
by equations 1) and 2) only incorporate the announcement surprises on days coinciding with the 42
monetary policy changes in our sample while our regression models described by equation 3) only
incorporate the announcement surprises coinciding with the same 42 days leaded one day at a time (as k
goes from 1 to 60). Therefore, our analysis, by construction, does not facilitate strong conclusions
regarding the exchange rate responses associated with these announcement surprises.
14