The Dynamic Impact of FX Interventions on Financial Markets

Abstract

Evidence on the effectiveness of FX interventions is either limited to short horizons or hampered by debatable identification. We address these limitations by identifying a structural vector autoregressive model for the daily frequency with an external instrument. Generally, we find, for freely floating currencies, that FX intervention shocks significantly affect exchange rates and that this impact persists for months. The signaling channel dominates the portfolio channel. Moreover, interest rates tend to fall in response to sales of the domestic currency, whereas stock prices of large (exporting) firms increase after devaluation of the domestic currency.

An Estimated DSGE Model for Integrated Policy Analysis

“…( 39) and ( 40), a shock (𝜀𝜀 𝑓𝑓𝑥𝑥,𝑡𝑡 ) is added to the rules to allow for temporary discretionary actions of the central bank. 6 The model implies that FX interventions will affect the currency via a portfolio balance channel, but also through interactions with interest rate policy via a signalling channel emphasized by Menkhoff et al (2021) and by Fratscher et al (2019). For example, an interest rate tightening communicated by the home central bank will tend to put appreciation pressure on the currency and when FXIs are related to changes in the nominal exchange rate (i.e.…”

A Macroeconomic Perspective on Brazilian FX Swaps

“…Macro-inclined papers of FX intervention include Tobal and Yslas (2018), Kohlscheen and Andrade (2014), Blanchard, Adler, and Filho (2015) and Menkhoff, Rieth, and Stöhr (2020). All these papers use some version of the vector-autoregressive (VAR) approach.…”

“…In a recent paper, Menkhoff et al (2020) use a structural VAR with external instruments approach to study the dynamic effects of FX interventions in financial markets. Using daily data and focusing on the Yen-Dollar exchange rate, they find that a surprise foreign currency purchase depreciates the yen significantly and is highly persistent.…”

Blowing against the Wind? a Narrative Approach to Central Bank Foreign Exchange Intervention

“…The literature also uses IV approaches, but these often fail to completely deal with the endogeneity issues (Menkhoff, Rieth, and Stöhr 2021;Naef and Weber 2021;Adler, Lisack, and Mano 2019). Yet these studies rarely convincingly address causality.…”