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Rules Versus Discretion in Foreign Exchange Intervention: Evidence from Official Bank of Canada High-Frequency Data

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Author Info
Rasmus Fatum (University of Alberta; University of California, Santa Cruz)
Michael King (Bank of Canada)

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Abstract

This paper contains an empirical analysis of high-frequency data on official Bank of Canada intervention and exchange rates (quoted at the end of every 5-minute interval over every 24-hour period). The data-set covers the January 1995 to September 1998 period and is of particular interest as it spans over two distinctly different intervention regimes one characterized by purely rules-based ("mechanistic") intervention versus one characterized by both rules-based and discretionary intervention. This unique feature of the data allows for a test of the hypothesis that discretionary intervention is more effective than rules-based intervention. Additionally, the paper introduces the issue of currency co-movements to the intervention literature. Employing an event-study methodology and different criteria for success, we find that intervention does not systematically affect movements in the CAD/USD or reduce realized price volatility. This is the case for both rules-based and discretionary intervention

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File URL: http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1047&context=sccie
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Publisher Info
Paper provided by Center for International Economics, UC Santa Cruz in its series Santa Cruz Center for International Economics, Working Paper Series with number 1047.

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Date of creation: 12 Nov 2004
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Handle: RePEc:cdl:scciec:1047

Note: oai:cdlib1.org:sccie-1047
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Related research
Keywords: Foreign Exchange Intervention; Intraday Data; Event Studies; Currency Co-movement;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Rasmus Fatum, 2000. "On the effectiveness of sterilized foreign exchange intervention," Working Paper Series 10, European Central Bank. [Downloadable!]
  2. Martin D. D. Evans & Richard K. Lyons, 2002. "Order Flow and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 170-180, February. [Downloadable!] (restricted)
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  3. Fischer, Andreas M., 2003. "Measurement error and the profitability of interventions: a closer look at SNB transactions data," Economics Letters, Elsevier, vol. 81(1), pages 137-142, October. [Downloadable!] (restricted)
  4. Payne, Richard & Vitale, Paolo, 2001. "A Transaction Level Study of the Effects of Central Bank Intervention of Exchange Rates," CEPR Discussion Papers 3085, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Fatum, Rasmus & Hutchison, Michael, 2006. "Effectiveness of official daily foreign exchange market intervention operations in Japan," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 199-219, March. [Downloadable!] (restricted)
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  6. Rogers, J. M. & Siklos, P. L., 2003. "Foreign exchange market intervention in two small open economies: the Canadian and Australian experience," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 393-416, June. [Downloadable!] (restricted)
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  7. Campbell, Cynthia J. & Wesley, Charles E., 1993. "Measuring security price performance using daily NASDAQ returns," Journal of Financial Economics, Elsevier, vol. 33(1), pages 73-92, February. [Downloadable!] (restricted)
  8. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March. [Downloadable!] (restricted)
  9. Christopher J. Neely, 2000. "The practice of central bank intervention: looking under the hood," Working Papers 2000-028, Federal Reserve Bank of St. Louis. [Downloadable!]
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  10. Fischer, Andreas M & Zurlinden, Mathias, 1999. "Exchange Rate Effects of Central Bank Interventions: An Analysis of Transaction Prices," Economic Journal, Royal Economic Society, vol. 109(458), pages 662-76, October. [Downloadable!] (restricted)
  11. King, Michael R, 2003. "Effective Foreign Exchange Intervention: Matching Strategies with Objectives," International Finance, Blackwell Publishing, vol. 6(2), pages 249-71, Summer. [Downloadable!] (restricted)
  12. Martin D. D. Evans & Richard K. Lyons, 2001. "Portfolio Balance, Price Impact, and Secret Intervention," NBER Working Papers 8356, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Rasmus Fatum & Michael M. Hutchison, . "Is Sterilized Foreign Exchange Intervention Effective After All? An Event Study Approach," EPRU Working Paper Series 99-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
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  14. 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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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael Melvin & Lukas Menkhoff & Maik Schmeling, 2008. "Automating Exchange Rate Target Zones: Intervention via an Electronic Limit Order Book," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 685-718. [Downloadable!]
    Other versions:
  3. Christopher J. Neely, 2007. "Central bank authorities’ beliefs about foreign exchange intervention," Working Papers 2006-045, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
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