Intervention and the foreign exchange risk premium: An empirical investigation of daily effects

Our paper assesses progress made by the profession in understanding whether and how exchange rate intervention works. We review theory and evidence on official intervention, concentrating primarily on work published in the last decade or so. We conclude that, unlike the profession's consensus of the 1980s, official intervention can be effective, especially as a signal of policy intentions and when publicly announced and concerted. We note an apparent empirical puzzle concerning the secrecy of much intervention and suggest another way for intervention to be effective which has received little attention in the literature, namely by remedying a coordination failure in the foreign exchange market.

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“…Similar results are obtained by several other studies (e.g. see Humpage and William Osterberg 1990;Eijffinger and Noud Gruijters 1991a,b).…”

Section: The Signalling Channel: Evidencesupporting

confidence: 92%

Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?

Sarno

Taylor

2001

Journal of Economic Literature

666

527

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“…For this reason, most empirical studies have focused on the central bank reaction functions and, thus, the determinants of the intervention activities of the Fed and the Deutsche Bundesbank (see, e.g., Almekinders & Eijffinger, 1994, 1996Baillie & Osterberg, 1997a). Only a few authors, like Baillie and Osterberg (1997b) and Humpage and Osterberg (1992), had access to Japanese intervention data. Recently, Hillebrand and Schnabel (2003) and Ito (2002) have used the published official JMA intervention data to analyze the Japanese foreign exchange market interventions.…”

Section: Introductionmentioning

confidence: 99%

On the determinants of “small” and “large” foreign exchange market interventions: The case of the Japanese interventions in the 1990s

Frenkel¹,

Pierdzioch

Stadtmann

2003

Rev Financ Econ

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During the past 30 years, central banks have often intervened in foreign exchange markets, and the magnitude of their foreign exchange market interventions has varied widely. We develop a quantitative reaction function model that renders it possible to examine the determinants of ''small'' and ''large'' interventions. We apply the model to analyzing the intervention policy of the Japanese monetary authorities (JMA) in the yen/U.S. dollar market during the period from 1991 through 2001. To this end, we use recently released official data on the foreign exchange market interventions of the JMA. We find that the JMA tended to conduct large interventions when the yen/U.S. dollar exchange rate drifted away from an ''implicit target exchange rate.'' D

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“…Dominguez andFrankel (1993a, 1993b) also found in favor of coordination. Humpage and Osterberg (1992), however, found that unilateral U.S. interventions were more effective than coordinated interventions between 1983and 1990. Chaboud and Humpage (2005 found only weak evidence that coordination increased the probability of success for Japanese interventions against dollars between 1991 and 2004.…”

Section: Conclusion and Discussionmentioning

confidence: 98%

The Federal Reserve as an Informed Foreign-Exchange Trader: 1973-1995

Bordo¹,

Humpage

Schwartz³

2011

Working Paper (Federal Reserve Bank of Cleveland)

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If official interventions convey private information useful for price discovery in foreign exchange markets, then they should have value as a forecast of near-term exchange rate movements. Using a set of standard criteria, we show that approximately 60 percent of all U.S. foreign exchange interventions between 1973 and 1995 were successful in this sense. This percentage, however, is no better than random. U.S. intervention sales and purchases of foreign exchange were incapable of forecasting dollar appreciations or depreciations. U.S. interventions, however, were associated with more moderate dollar movements in a manner consistent with leaning against the wind, but only 22 percent of all U.S. interventions conformed to this pattern. We also found that the larger the size of an intervention, the greater was its probability of success. In this context, most U.S. interventions appear to have been too small to have had a high probability of success. Other potential characteristics of intervention-notably, coordination and secrecy-did not seem to influence our success rates.

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Intervention and the foreign exchange risk premium: An empirical investigation of daily effects

Cited by 20 publications

References 21 publications

Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?

Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?

On the determinants of “small” and “large” foreign exchange market interventions: The case of the Japanese interventions in the 1990s

The Federal Reserve as an Informed Foreign-Exchange Trader: 1973-1995

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