during the post- 1982 period of growing federal deficits, the unanticipated
Treasury debt announcements were found to be the primary determinant of exchange rate movements. During this latter period, response to measures of real
economic activity on the Treasury's announcement days was insignificant.
Finally, a change in direction of responses in exchange rates to economic
news over the two periods was also found. During the period prior to 1982,
the dollar generally depreciated in response to news of increased economic
activity. On the other hand, during the post-1982 period the response to
news of an unexpectedly large Treasury funding announcement was, in
general, an appreciation of the dollar.
See, among others, R. Dornbush, "Exchange Rate Economics: Where We
Stand," Brookings Papers on Economic Activity 1 ( 1980):143-85; J. A. Frenkel, "Flexible Exchange Rates, Prices and the Role of 'News': Lessons from the 1970s," Journal of Political Economy 89 ( August 1981):665-705; S. Edwards, "Exchange
Rate Efficiency and New Information," Economic Letters 9 ( 1982):377-82; B. Cornell
, "Money Supply Announcements, Interest Rates, and Foreign Exchange," Journal of International Money & Finance 1 ( August 1982):201-8; B. Cornell, "Money Supply Announcements and Interest Rates: Another View," Journal of
Business 55 ( January 1983):123; "The Money Supply Announcement Puzzle:
Review and Interpretation," American Economic Review 73, no. 4 ( September 1983):644-57; Charles Engel and
Jeffrey Frankel, "Why Interest Rates React to
Money Announcements: An Explanation from Foreign Exchange Markets," Journal of Monetary Economics 13 ( January 1984):31-39; G. A. Hardouvelis, "Market
Perceptions of Federal Reserve Policy and the Weekly Monetary Announcements," Journal of Monetary Economics 14 ( September 1984):225-40; C. S. Hakkio and
D. K. Pearce
, "The Reaction of Exchange Rates to Economic News," Economic Inquiry 23 ( October 1985):621-36; W. Patton Culberton Jr. and
Faik Koray, "Interest Rates, the Forward Premium and Unanticipated Money," Southern
Economic Journal 53 ( October 1986):393-99.
While this study does have implications for the relationship between asset
prices and government deficits, its primary focus is not on this broader issue. For
an excellent review of this deficit literature see the U.S. Treasury publication, "The
Effects of Deficits on Prices of Financial Assets: Theory and Evidence," U.S.
Treasury Department, Office of the Assistant Secretary for Economic Policy, March 1984.
The t statistic obtained for this test was t = 2.062.
The identification of the order of the ARMA model was determined through
an analysis of the actual historic announcement data. The primary tool used in the
identification process was the autocorrelation function. The sample autocorrelation
for the series displayed large autocorrelation at lags of I and 3. Therefore a moving
average model of orders I and 3 was used to capture the process. Our estimated
equation for the debt announcement expectation is: Kt = 546.896 - 0.440At-1 +
0.409At-3; R2 = .233; S.E. = 1366.4; DW = 1.897.
Scott G. Hein, "The Response of Short-Term Interest Rates to Weekly
Money Announcements: A Comment," Journal of Money, Credit and Banking 17
( May 1985):264-71.