TY - JOUR AU - Clarida, Richard AU - Waldman, Daniel TI - Is Bad News About Inflation Good News for the Exchange Rate? JF - National Bureau of Economic Research Working Paper Series VL - No. 13010 PY - 2007 Y2 - April 2007 DO - 10.3386/w13010 UR - http://www.nber.org/papers/w13010 L1 - http://www.nber.org/papers/w13010.pdf N1 - Author contact info: Richard H. Clarida Columbia University 420 West 118th Street Room 1111, IAB New York, NY 10027 Tel: 212/854-3676 Fax: 212/854-8059 E-Mail: rhc2@columbia.edu Daniel Waldman 200 East 72nd Street- Apt. 9F New York, NY 10021 E-Mail: djw74@columbia.edu M1 - published as Richard H. Clarida, Daniel Waldman. "Is Bad News about Inflation Good News for the Exchange Rate? And, If So, Can That Tell Us Anything about the Conduct of Monetary Policy?," in John Y. Campbell, editor, "Asset Prices and Monetary Policy" University of Chicago Press (2008) M3 - presented at "Asset Prices and Monetary Policy Conference", May 5-6, 2006 AB - We show in a simple—but robust—theoretical monetary exchange rate model that the sign of the covariance between an inflation surprise and the nominal exchange rate can tell us something about how monetary policy is conducted. Specifically, we show that 'bad news' about inflation—that it is higher than expected—can be 'good news' for the nominal exchange rate—that it appreciates on this news—if the central bank has an inflation target that it implements with a Taylor Rule. The empirical work in this paper examines point sampled data on inflation announcements and the reaction of nominal exchange rates in 10 minute windows around these announcements for 10 countries and several different inflation measures for the period July 2001 through March 2005. When we pool the data, we do in fact find that bad news about inflation is indeed good news for the nominal exchange rate, that the results are statistically significant, and that the r-square is substantial, in excess of 0.25 for core measures of inflation. We also find significant differences comparing the inflation targeting countries and the two non-inflation targeting countries. ER -