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A New Method for Identifying the Effects of Foreign Exchange Interventions

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  • CHIH‐NAN CHEN
  • TSUTOMU WATANABE
  • TOMOYOSHI YABU

Abstract

The monetary authorities react even to intraday changes in the exchange rate; however, in most cases, intervention data is available only at a daily frequency. This temporal aggregation makes it difficult to identify the effects of interventions on the exchange rate. We propose a new method based on Markov Chain Monte Carlo simulations to cope with this endogeneity problem: We use "data augmentation" to obtain intraday intervention amounts and then estimate the efficacy of interventions using the augmented data. Applying this method to Japanese data, we find that an intervention of one trillion yen moves the yen/dollar rate by 1.7 percent, which is more than twice as large as the magnitude reported in previous studies applying OLS to daily observations. This shows the quantitative importance of the endogeneity problem due to temporal aggregation.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 44 (2012)
Issue (Month): 8 (December)
Pages: 1507-1533

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Handle: RePEc:mcb:jmoncb:v:44:y:2012:i:8:p:1507-1533

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Payne, Richard & Vitale, Paolo, 2003. "A transaction level study of the effects of central bank intervention on exchange rates," Journal of International Economics, Elsevier, vol. 61(2), pages 331-352, December.
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  7. Ito, Takatoshi & Yabu, Tomoyoshi, 2007. "What prompts Japan to intervene in the Forex market? A new approach to a reaction function," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 193-212, March.
  8. Rasmus Fatum, 2009. "Official Japanese Intervention in the JPY/USD Exchange Rate Market: Is It Effective, and through Which Channel Does It Work?," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 27(1), pages 75-98, November.
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  11. Edison, H.J., 1993. "The Effectiveness of Central-Bank Intervention: A Survey of the Litterature after 1982," Princeton Studies in International Economics 18, International Economics Section, Departement of Economics Princeton University,.
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  13. Almekinders, G.J. & Eijffinger, S.C.W., 1996. "A friction model of daily Bundesbank and Federal Reserve intervention," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73527, Tilburg University.
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Cited by:
  1. Rasmus Fatum & Yohei Yamamoto, 2012. "Does foreign exchange intervention volume matter?," Globalization and Monetary Policy Institute Working Paper 115, Federal Reserve Bank of Dallas.
  2. Moura, Marcelo L. & Pereira, Fatima R. & Attuy, Guilherme de Moraes, 2013. "Currency Wars in Action: How Foreign Exchange Interventions Work in an Emerging Economy," Insper Working Papers wpe_304, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.

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