Interdependence between the euro area and the US: What role for EMU?
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1 Michael Ehrmann and Marcel Fratzscher: Interdependence between the euro area and the US: What role for EMU? Jon Faust faustj/jon Federal Reserve Board Fed/ECB/CGES/CFS Conference, 2003 p.1/19
2 Interesting paper Good topic Fed/ECB/CGES/CFS Conference, 2003 p.2/19
3 Interesting paper Good topic How does EMU show in the data? Fed/ECB/CGES/CFS Conference, 2003 p.2/19
4 Interesting paper Good topic How does EMU show in the data? Good approach Fed/ECB/CGES/CFS Conference, 2003 p.2/19
5 Interesting paper Good topic How does EMU show in the data? Good approach Effects may show first in financial markets especially in response standardized macro news Fed/ECB/CGES/CFS Conference, 2003 p.2/19
6 Interesting paper Good topic How does EMU show in the data? Good approach Effects may show first in financial markets especially in response standardized macro news Good implementation Fed/ECB/CGES/CFS Conference, 2003 p.2/19
7 Interesting paper Good topic How does EMU show in the data? Good approach Effects may show first in financial markets especially in response standardized macro news Good implementation Follows good earlier work (ABDV) Careful and clear Fed/ECB/CGES/CFS Conference, 2003 p.2/19
8 Interesting results Fed/ECB/CGES/CFS Conference, 2003 p.3/19
9 Interesting results Growing links among announcements (Table 10) fascinating Fed/ECB/CGES/CFS Conference, 2003 p.3/19
10 Interesting results Growing links among announcements (Table 10) fascinating Big lit. on changing co-movement Hard to find evidence (many papers including Doyle and Faust) Fed/ECB/CGES/CFS Conference, 2003 p.3/19
11 Interesting results Growing links among announcements (Table 10) fascinating Big lit. on changing co-movement Hard to find evidence (many papers including Doyle and Faust) Surprising find anything in 10 yr. sample Requires careful interpretation Fed/ECB/CGES/CFS Conference, 2003 p.3/19
12 My discussion: 2 main issues Fed/ECB/CGES/CFS Conference, 2003 p.4/19
13 My discussion: 2 main issues Role of lagged foreign rate Complicates the interpretation I ll show may be important Fed/ECB/CGES/CFS Conference, 2003 p.4/19
14 My discussion: 2 main issues Role of lagged foreign rate Complicates the interpretation I ll show may be important Intradaily data/longer sample Can do intradaily: FRWW/ABDV I ll show a few results Fed/ECB/CGES/CFS Conference, 2003 p.4/19
15 The lagged foreign rate change The U.S. mean equation: r US t = α 2 + β2 EA rt EA + other terms Fed/ECB/CGES/CFS Conference, 2003 p.5/19
16 The lagged foreign rate change The U.S. mean equation: r US t = α 2 + β2 EA rt EA + other terms r EA t lagged because of quote timing Fed/ECB/CGES/CFS Conference, 2003 p.5/19
17 The lagged foreign rate change The U.S. mean equation: r US t = α 2 + β2 EA rt EA + other terms r EA t lagged because of quote timing Rise in magnitude and significance of ˆβ 2 is major part of story Fed/ECB/CGES/CFS Conference, 2003 p.5/19
18 What is lagged EA rate change measuring? Fed/ECB/CGES/CFS Conference, 2003 p.6/19
19 What is lagged EA rate change measuring? LHS: r US t is from 17:30 to 17:30, NY time Fed/ECB/CGES/CFS Conference, 2003 p.6/19
20 What is lagged EA rate change measuring? LHS: r US t is from 17:30 to 17:30, NY time RHS: r EA t is from 5am to 5am, NY Fed/ECB/CGES/CFS Conference, 2003 p.6/19
21 What is lagged EA rate change measuring? LHS: r US t is from 17:30 to 17:30, NY time RHS: r EA t is from 5am to 5am, NY EA change at t determined before most NY markets open at t; before U.S. macro news at t. Fed/ECB/CGES/CFS Conference, 2003 p.6/19
22 But... r EA t not predetermined in U.S. regression Fed/ECB/CGES/CFS Conference, 2003 p.7/19
23 But... r EA t not predetermined in U.S. regression Time periods spanned by LHS and RHS rate changes overlap from 17:30 at t 1 to 5:00 at t. Fed/ECB/CGES/CFS Conference, 2003 p.7/19
24 But... r EA t not predetermined in U.S. regression Time periods spanned by LHS and RHS rate changes overlap from 17:30 at t 1 to 5:00 at t. News moving rates in this window will be attributed to β 2 even if no EA US causality. Fed/ECB/CGES/CFS Conference, 2003 p.7/19
25 But... r EA t not predetermined in U.S. regression Time periods spanned by LHS and RHS rate changes overlap from 17:30 at t 1 to 5:00 at t. News moving rates in this window will be attributed to β 2 even if no EA US causality. ˆβ2 should not be interpreted as importance of EA for US. Fed/ECB/CGES/CFS Conference, 2003 p.7/19
26 Practical importance? Fed/ECB/CGES/CFS Conference, 2003 p.8/19
27 Practical importance? ˆβ 2 could be rise in share of news arriving overlap window Fed/ECB/CGES/CFS Conference, 2003 p.8/19
28 Practical importance? ˆβ 2 could be rise in share of news arriving overlap window Intuition: surely not much happens from 5:30pm to 5am NY Fed/ECB/CGES/CFS Conference, 2003 p.8/19
29 Practical importance? ˆβ 2 could be rise in share of news arriving overlap window Intuition: surely not much happens from 5:30pm to 5am NY In Fi. Mkt. only reliable intuition is: you should verify your intuitions Fed/ECB/CGES/CFS Conference, 2003 p.8/19
30 A quick check Fed/ECB/CGES/CFS Conference, 2003 p.9/19
31 A quick check There are $ markets open at 5:00am NY: $ LIBOR. Fed/ECB/CGES/CFS Conference, 2003 p.9/19
32 A quick check There are $ markets open at 5:00am NY: $ LIBOR. Include r $5am t in the regression. Fed/ECB/CGES/CFS Conference, 2003 p.9/19
33 A quick check There are $ markets open at 5:00am NY: $ LIBOR. Include r $5am t in the regression. May soak up effect of news in problem time window. Fed/ECB/CGES/CFS Conference, 2003 p.9/19
34 A quick check There are $ markets open at 5:00am NY: $ LIBOR. Include r $5am t in the regression. May soak up effect of news in problem time window. Just suggestive; does not fix the simultaneity problem. Fed/ECB/CGES/CFS Conference, 2003 p.9/19
35 Quick and dirty estimates My equation: r US t = α 2 + β2 EA rt EA + γ r 5am t + 3 lags LHS + ε t Fed/ECB/CGES/CFS Conference, 2003 p.10/19
36 Quick and dirty estimates My equation: r US t = α 2 + β2 EA rt EA + γ r 5am t + 3 lags LHS + ε t My data; slightly different sample period; no dummies or news surprises simple OLS. Fed/ECB/CGES/CFS Conference, 2003 p.10/19
37 Results ˆβ 2 ˆγ ˆβ2 ˆγ EF *** new *** add γ *** *** Fed/ECB/CGES/CFS Conference, 2003 p.11/19
38 Digression on units ABDV, EF, others put surprises in std. dev. units Fed/ECB/CGES/CFS Conference, 2003 p.12/19
39 Digression on units ABDV, EF, others put surprises in std. dev. units I prefer natural units of the data item. Fed/ECB/CGES/CFS Conference, 2003 p.12/19
40 Digression on units ABDV, EF, others put surprises in std. dev. units I prefer natural units of the data item. At one level, just normalization isssue Fed/ECB/CGES/CFS Conference, 2003 p.12/19
41 But... Intuitions/theory on magnitude are about natural units Fed/ECB/CGES/CFS Conference, 2003 p.13/19
42 But... Intuitions/theory on magnitude are about natural units Failure to convert back yields interp. errors. Fed/ECB/CGES/CFS Conference, 2003 p.13/19
43 But... Intuitions/theory on magnitude are about natural units Failure to convert back yields interp. errors. Difficult to compare across papers with diff. samples. Fed/ECB/CGES/CFS Conference, 2003 p.13/19
44 But... Intuitions/theory on magnitude are about natural units Failure to convert back yields interp. errors. Difficult to compare across papers with diff. samples. I ll report in natural units below Fed/ECB/CGES/CFS Conference, 2003 p.13/19
45 Intradaily data/longer sample U.S. data releases carefully timed; can study surprises in narrow time window Fed/ECB/CGES/CFS Conference, 2003 p.14/19
46 Intradaily data/longer sample U.S. data releases carefully timed; can study surprises in narrow time window Much work says: Response is complete in minutes Can obtain much more precise estimates Fed/ECB/CGES/CFS Conference, 2003 p.14/19
47 Intradaily data/longer sample U.S. data releases carefully timed; can study surprises in narrow time window Much work says: Response is complete in minutes Can obtain much more precise estimates Benefits for Europe as well; need bigger window. Fed/ECB/CGES/CFS Conference, 2003 p.14/19
48 Intradaily data/longer sample U.S. data releases carefully timed; can study surprises in narrow time window Much work says: Response is complete in minutes Can obtain much more precise estimates Benefits for Europe as well; need bigger window. I ll give examples: longer sample/smaller window Fed/ECB/CGES/CFS Conference, 2003 p.14/19
49 Basics Details, see: Faust, Rogers, Wang, Wright (2002) Fed/ECB/CGES/CFS Conference, 2003 p.15/19
50 Basics Details, see: Faust, Rogers, Wang, Wright (2002) Sample , 2 U.S. recessions Fed/ECB/CGES/CFS Conference, 2003 p.15/19
51 Basics Details, see: Faust, Rogers, Wang, Wright (2002) Sample , 2 U.S. recessions Basic regression: d t = βs t + ε t d t rate change from -5 min to +15 min s t the data surprise Fed/ECB/CGES/CFS Conference, 2003 p.15/19
52 Basics Details, see: Faust, Rogers, Wang, Wright (2002) Sample , 2 U.S. recessions Basic regression: d t = βs t + ε t d t rate change from -5 min to +15 min s t the data surprise Separate eqn. for each announcement type Fed/ECB/CGES/CFS Conference, 2003 p.15/19
53 Basics Details, see: Faust, Rogers, Wang, Wright (2002) Sample , 2 U.S. recessions Basic regression: d t = βs t + ε t d t rate change from -5 min to +15 min s t the data surprise Separate eqn. for each announcement type 1 obs. per announcement; no lag needed. Fed/ECB/CGES/CFS Conference, 2003 p.15/19
54 Remember Different data, different method, different sample period. Fed/ECB/CGES/CFS Conference, 2003 p.16/19
55 Significance, pre-emu US EA effects EF Payrolls *** *** GDP ** R Sales *** CPI *** Fed/ECB/CGES/CFS Conference, 2003 p.17/19
56 Significance, pre-emu US EA effects EF Payrolls *** *** GDP ** R Sales *** CPI *** Note: for all are significant Fed/ECB/CGES/CFS Conference, 2003 p.17/19
57 Size (BP) of pre-emu US EA effects EF Payrolls 100T GDP %AR R Sales % CPI % Fed/ECB/CGES/CFS Conference, 2003 p.18/19
58 Summary Paper is on right track, small changes will yield big gains Fed/ECB/CGES/CFS Conference, 2003 p.19/19
59 Summary Paper is on right track, small changes will yield big gains Resolve simultaneity, think about longer sample/intradaily Fed/ECB/CGES/CFS Conference, 2003 p.19/19
60 Summary Paper is on right track, small changes will yield big gains Resolve simultaneity, think about longer sample/intradaily Table 10 very intriguing Fed/ECB/CGES/CFS Conference, 2003 p.19/19
61 Summary Paper is on right track, small changes will yield big gains Resolve simultaneity, think about longer sample/intradaily Table 10 very intriguing New idea: add UK as a control group Fed/ECB/CGES/CFS Conference, 2003 p.19/19
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