framework and show that, in particular, a loosening of US monetary policy is associated with a same-day
depreciation of the USD.
Two insights that follow from our work are that only the surprise component of an actual
monetary policy change has an impact on exchange rates and that the associated exchange rate response
occurs within the same day of the policy change. The most important insight, however, is that failure to
disentangle the surprise component from the actual monetary policy change can lead to an
underestimation of the impact of monetary policy or even to a false acceptance of the hypothesis that
monetary policy has no impact on exchange rates. This has general implications for the empirical
literature on asset price responses to macro news. It suggests that there is a need for reexamining the
results from empirical analyses that do not isolate the unexpected component of news from the expected
element.
19
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