The effects of conventional and unconventional monetary policy on exchange rate volatility.

Abstract

This study explores the effects of the conventional and unconventional monetary policies as well as other events related with debt Greek crisis on the behavior of exchange rates. Using a multivariate GARCH model with time-varying conditional variances and covariances, we estimate the effects of these macroeconomic events on both the variances and covariance between the Yen and the Euro in terms of the US dollar. Our findings suggest that the conventional and unconventional measures and specific events relating to Greek debt crisis have significantly increased the exchange rate volatility of the EUR/USD on the one hand, on the other the conditional variance of the JPY/USD are significantly increased by conventional and unconventional monetary policies only. We also find that the conventional measures have decreased the covariance whereas the unconventional measures have significantly increases the covariance of the two currencies. Additionally the BDS test statistic is applied for both the standardised residuals and the squared standardised residuals of the VECH-GARCH model with and without dummies as far as the EUR/USD and JPY/USD concerned. The null hypothesis that the data are white noise is accepted for all dimensions. Finally, the nonparametric causality test is used to examine possible nonlinear causality and the results indicate causality runs unidirectionally from the variance of EUR/USD to the variance of JPY/USD.