The effectiveness of foreign exchange intervention in emerging market countries: Evidence from the Czech koruna

Disyatat, Piti; Galati, Gabriele

doi:10.1016/j.jimonfin.2007.01.001

Cited by 140 publications

(131 citation statements)

References 37 publications

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“…The exchange rate may influence the movements of policy reaction function indirectly through its effects on the domestic variables such as inflation and output gap. On the other hand, the central bank may react to the exchange rate movements through intervention in the foreign exchange market as argued in many studies (for example Osawa (2006), Disyatat & Galati (2005)). …”

Section: Resultsmentioning

confidence: 99%

Interactions between Monetary Policy and Exchange Rate in Inflation Targeting Emerging Countries: The Case of Three East Asian Countries

Sek¹

2009

IJEF

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This paper investigates empirically how the reaction of monetary policy to exchange rate has changed after the adoption of inflation targeting regime in three East-Asian countries. Using a system equation of structural VAR and a single equation approaches, this paper shows that the reactions of monetary policy to exchange rate shocks as well as CPI (demand shocks) and output (supply shocks) have declined under the inflation targeting environment. The policy function reacts weakly to the exchange rate movements before and after the financial crisis of 1997 in two out of the three countries. These central banks react differently to inflation. Empirical estimations of policy reaction functions indicate that the policy maker in Philippines pays higher concerns on output gap stability in the post-crisis period although Philippines has implemented the inflation targeting regime.Keywords: Exchange rate, Inflation targeting, Policy reaction function IntroductionAlthough the role of exchange rate in the setup of monetary policy in emerging market is no longer new in the international macroeconomics literatures, it still remains as a hot topic for debates among researchers. The research on the design of monetary policy rule before was based on the case of closed economy. For example, in the simple Taylor rule, interest rate as the policy instrument is a weighted function of inflation and output gap. This rule does not give a direct role to the exchange rate.However, in the real world, economies are quite open and the exchange rate movements can be matter in the design of monetary policy. Many studies suggest the inclusion of exchange rate term in the policy reaction function and show that exchange rate plays an improving role in the performances of monetary policy rules and enhances higher welfare of agents (for examples Ball (1999), Batini et.al (2001 and Senay (2001)). Exchange rate contributes to the demand channel through the effects of relative price (foreign and domestic goods) and creates the direct exchange rate channel through the convert of domestic currency prices of foreign produced goods. It affects the aggregate demand for domestic goods (Senay, 2001).On the other hand, there are opinions which against this view. There are arguments that central banks should concern the effects of exchange rate fluctuations on inflation and output gap rather than giving an independence role for the exchange rate in the policy reaction (Mishkin (2000) and Schmidt-Hebbel (2002)). The reasons are exchange rate already has the indirect effects on inflation and output in the policy reaction function. Giving a direct role to exchange rate in the Taylor rule may add volatility to the monetary policy (Taylor, 2001). This paper extends the studies on the role of exchange rate in the monetary policy reaction under the inflation targeting environment in three inflation targeting East-Asian countries. It seeks to investigate the relationship between monetary policy and exchange rate from two perspectives: the impulse response of...

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Section: Resultsmentioning

confidence: 99%

Interactions between Monetary Policy and Exchange Rate in Inflation Targeting Emerging Countries: The Case of Three East Asian Countries

Sek¹

2009

IJEF

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“…6 They consider daily data over January 1996 -November 2005 and find weak evidence that intervention operations impacts risk reversals. Disyatat and Galati (2007) study the impact of official intervention on the value of risk reversals in the Czech Koruna -Euro, using daily data over September 2001 to September 2002. They also find that intervention has a limited impact on risk reversals, but that macroeconomic news is not significant.…”

Section: Introductionmentioning

confidence: 99%

Impact of macro-economic surprises on carry trade activity

Hutchison

Sushko

2013

Journal of Banking & Finance

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper investigates market perceptions of the risk of large exchange rate movements by using information gleaned from risk reversal contracts and macroeconomic news surprises. We focus on the height of the carry trade period in Japan (March 2004 through December 2006). Concerns about sharp yen appreciation were particularly evident during the period of heavy carry trade activity and are more likely to show up in the price of risk. We focus on "big" news surprises that are more likely to convey information about the risk of large changes in the exchange rate, consider a broad set of news, and investigate the direct impact of news on the value of dollar yen risk reversals. We also consider the effect of the value of risk reversals on the yen carry trade, using (non-commercial) open interest positions in futures markets as a proxy for carry trade activity. Overall, we find that macroeconomic news is an important determinant of risk reversals during periods of heavy carry trade volume, particularly when the cost of hedging against large yen appreciation is increasing. Moreover, there is a close link between risk reversals and non-commercial futures positions. We calculate a substantial effect of macroeconomic news on carry trade activity, with risk reversals (the cost of hedging) as the transmission mechanism. Terms of use: Documents inJEL classification: C22, F31, G14

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“…The nature of domestic financial markets can, a priori, influence the effectiveness of these two channels. For example, emerging market currencies, which are generally regarded as riskier than reserve currencies, face limited levels of cross-currency substitutability, which should strengthen the portfolio channel (Disyatat and Galati, 2005) -an effect that should be further amplified by shallow, illiquid financial markets (Mohanty and Turner, 2005). By contrast, the incidence of the nominal uncertainty and poor track record characteristic of many emerging economies on intervention effectiveness through the signalling channel is ambiguous: it may detract from the impact of intervention on expectations (if monetary policy is seen as erratic and noisy) or enhance it (if policy is perceived as opaque but consistent).…”

confidence: 99%