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Foreign exchange intervention as a signal of monetary policy

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Author Info

  • Michael W. Klein
  • Eric S. Rosengren

Abstract

Recent experience with exchange rate management has rekindled interest in the efficacy of foreign exchange intervention. While there is broad evidence that sterilized intervention has no effect on the exchange rate through a portfolio balance channel, less evidence exists on the signalling role of intervention. This article considers the signalling role of intervention for the United States and West Germany between the 1985 Plaza Accord and the October 1987 stock market crash. ; An examination of the data shows that intervention observed by the foreign exchange market did not precede changes in monetary policy in a proximate or consistent fashion. Thus the study concludes that, after the fact, intervention was not a signal of subsequent monetary policy. The study also explores the possibility that during this period participants in the foreign exchange market viewed intervention as a signal. While the daily response of the change in the deutsche mark/dollar exchange rate showed a significant effect of intervention in the early part of this sample period, the effect eroded over time as monetary authorities failed to back up intervention with monetary policy.

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File URL: http://www.bostonfed.org/economic/neer/neer1991/neer391c.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1991)
Issue (Month): May ()
Pages: 39-50

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Handle: RePEc:fip:fedbne:y:1991:i:may:p:39-50

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Keywords: Foreign exchange - Law and legislation ; Monetary policy;

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Citations

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Cited by:
  1. Fischer, Andreas M, 2000. "Do Interventions Smooth Interest Rates?," CEPR Discussion Papers 2479, C.E.P.R. Discussion Papers.
  2. Vitale, Paolo, 2006. "A Market Microstructure Analysis of Foreign Exchange Intervention," CEPR Discussion Papers 5468, C.E.P.R. Discussion Papers.
  3. Sweeney, Richard J., 2007. "Fed intervention, dollar appreciation, and systematic risk," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 167-192, March.
  4. William P. Osterberg & Rebecca Wetmore Humes, 1995. "More on the differences between reported and actual U.S. central bank foreign exchange intervention," Working Paper 9501, Federal Reserve Bank of Cleveland.
  5. Karen K. Lewis, 1993. "Are Forign Exchange Intervention and Monetary Policy Related and Does it Really Matter?," NBER Working Papers 4377, National Bureau of Economic Research, Inc.
  6. Juann H. Hung, 1995. "Intervention strategies and exchange rate volatility: a noise trading perspective," Research Paper 9515, Federal Reserve Bank of New York.
  7. William P. Osterberg, 1995. "Can foreign exchange intervention signal monetary policy changes?," Economic Commentary, Federal Reserve Bank of Cleveland, issue May 1.
  8. Reeves, Silke Fabian, 1997. "Exchange rate management when sterilized interventions represent signals of monetary policy," International Review of Economics & Finance, Elsevier, vol. 6(4), pages 339-360.
  9. Neil, Beattie & Fillion, Jean-François, 1999. "An Intraday Analysis of the Effectiveness of Foreign Exchange Intervention," Working Papers 99-4, Bank of Canada.
  10. Richard T. Baillie & William P. Osterberg, 1998. "Central bank intervention and overnight uncovered interest rate parity," Working Paper 9823, Federal Reserve Bank of Cleveland.
  11. Richard T. Baillie & William P. Osterberg, 1991. "The risk premium in forward foreign exchange markets and G-3 central bank intervention: evidence of daily effects, 1985-1990," Working Paper 9109, Federal Reserve Bank of Cleveland.
  12. Vitale, Paolo, 2006. "A Critical Appraisal of Recent Developments in the Analysis of Foreign Exchange Intervention," CEPR Discussion Papers 5729, C.E.P.R. Discussion Papers.
  13. Baillie, Richard T. & Osterberg, William P., 2000. "Deviations from daily uncovered interest rate parity and the role of intervention," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 363-379, December.
  14. Almekinders, G.J., 1993. "Theories on the scope for foreign exchange market intervention," Discussion Paper 1993-42, Tilburg University, Center for Economic Research.
  15. Richard T. Baillie & Owen F. Humpage, 1992. "Post-Louvre intervention: did target zones stabilize the dollar?," Working Paper 9203, Federal Reserve Bank of Cleveland.
  16. William P. Osterberg, 1997. "Does intervention explain the forward discount puzzle?," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 24-31.
  17. Vitale, Paolo, 1999. "Sterilised central bank intervention in the foreign exchange market," Journal of International Economics, Elsevier, vol. 49(2), pages 245-267, December.
  18. Thomas Willett, 1999. "Developments in the Political Economy of Policy Coordination," Open Economies Review, Springer, vol. 10(2), pages 221-253, May.
  19. Baillie, Richard T. & Osterberg, William P., 1997. "Why do central banks intervene?," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 909-919, December.
  20. Owen F. Humpage, 1998. "The Federal Reserve as an informed foreign-exchange trader," Working Paper 9815, Federal Reserve Bank of Cleveland.

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