Monetary Policy and Exchange Rate Volatility of the Mexican Peso Against the US Dollar

This paper examines the impacts of monetary policy announcements on exchange rate volatility of the Mexican peso, a currency that is representative of emerging market currencies, against the US dollar. Narrow windows around policy announcements and high-frequency second-by-second intraday data are used in the analysis. To examine the impact of announcements on exchange rate volatility, we divide the announcement period into a pre-announcement period (five minutes before the announcement), a contemporaneous period (five minutes after the announcement), and a post-announcement period (fifteen minutes after the “contemporaneous period”). While incorporating monetary policy announcements from both the US and Mexico, we find that US monetary policy announcements have greater impacts on the volatility relative to Mexican monetary policy announcements, although both of them lead to significant increases in the volatility around announcements. Furthermore, the increase in volatility resulting from the US announcements lasts for all of the sub-periods, while the Mexican announcements cause an increase in volatility only over the first two periods. In other words, the impact of US monetary policy tends to be more persistent than Mexican monetary policy with respect to peso/dollar volatility.