Macroeconomic News and Exchange Rates: Evidence of Unstable Effect

Although the link between macroeconomic news announcements and exchange rates is well documented in recent literature, this connection may be unstable. By using a broad set of macroeconomic news announcements and high frequency forex data for the Euro/Dollar, Pound/Dollar and Yen/Dollar from Nov 1, 2004 to Mar 31, 2014, we obtain two major findings with regards to this instability. First, many macroeconomic news announcements exhibit unstable effects with certain patterns in foreign exchange rates. These news effects may change in magnitude and even in their sign over time, over business cycles and crises within distinctive contexts. This finding is robust because the results are obtained by applying a Two-Regime Smooth Transition Regression Model, a Breakpoints Regression Model, and an Efficient Test of Parameter Instability which are all consistent with each other. Second, when we explore the source of this instability, we find that global risks and the reaction by central bank monetary policy to these risks to be possible factors causing this instability.