Contemporaneous Reserve Accounting, M1 Announcements and Exchange Rate Movements

Economic "news" or unanticipated surprises that affect exchange rates may entail several factors, namely, unexpected news on inflation rates (price levels), money supplies, interest rates, GNP growth rates or current accounts. In this vein, several authors have examined the impact of unexpected news on exchange rates. For example, Dornbusch (1980) investigated the impact of surprises in the current account, interest rates and GNP growth rates on short term exchange rate movements. Frankel (1981), Edwards (1982) and Longworth (1984) have also considered the effect of unanticipated changes in economic factors on exchange rates. On average their results support the view that unexpected news moves exchange rates, though they did not focus on specific announcements. Their innovations were constructed from autoregressive techniques in which the residuals or forecast errors were used as economic surprises. Additionally, their use of monthly data may not have presented a clear picture of news effects on exchange rates. In this study we examine the effect of "news" embodied in the weekly announcements of the U.S. money supply. Previous studies tend to support the hypothesis of a systematic relationship between exchange rates and unexpected money supply announcements.1 Additionally, a recent study by Hakkio and Pearce (1986) determined that only money supply announcements, not news on inflation or real activity is systematically related to short run exchange rate movements. Given this fact and the desire to focus on monetary policy, only monetary announcements are investigated for their impact on exchange rates.