A survey on the effects of sterilized foreign exchange intervention

Abstract

In this paper we survey prominent theories that have shaped the literature on sterilized foreign exchange interventions. We identify three main strands of literature: 1) that which advocates the use of sterilized interventions; 2) that which deems sterilized interventions futile;and 3) that which requires some market friction in order for sterilized interventions to be effective.We contribute to the literature in three important ways. First, by reviewing new theoretical models that have surfaced within the last decade. Second, by further penetrating into the theory of interventions in order to analyze the key features that make each model distinct. And third, by only focusing on sterilized operations, which allows us to sidestep the effects induced by changes in the stock of money supply. Additionally, the models that we present comprise both a macro and micro-structure approach so as to provide a comprehensive view of the theory behind exchange rate intervention.

Identifying the Effects of Simultaneous Monetary Policy Shocks

“…Menkhoff () surveys 25 studies of which: 15 show a significant effect on exchange rate levels (small and short‐lived for most), 5 show no significant impact, and 5 show mixed, or unavailable results. Similarly, Villamizar‐Villegas and Perez‐Reyna () survey 32 studies of which: 16 show a significant effect on exchange rate levels (also small and short‐lived for most), 14 show no significant impact, and 2 show mixed results.…”

Impact of Central Bank Intervention in the Foreign Exchange Market: Evidence from India Using an Event Study Approach

“…The theoretical literature has perceived several channels of influence through which intervention will impact exchange rate movement and volatility (see Villamizar‐Villegas & Perez‐Reyna, ; for a comprehensive review). Intervention may affect the exchange rate through changes in real interest rates following changes in monetary policy (Archer, ; Humpage, ) or changes in the portfolio of assets investors hold/ want to hold under different central bank policy regimes (Galati et al ., ).…”

Integrated Policy Framework—Principles for the Use of Foreign Exchange Intervention

“…Implicit in this channel is the assumption that FXI provides markets with new information from authorities that are willing to convey this information through their actions in the foreign exchange market. Theoretical surveys that explore these two channels are Sarno and Taylor (2001), Evans (2005), Lyons (2006), Villamizar andPerez-Reyna (2015).…”