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Evaluating Foreign Exchange Market Intervention: Self-Selection, Counterfactuals and Average Treatment Effects

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  • Fatum, Rasmus
  • Hutchison, Michael M.

Abstract

Studies of central bank intervention are complicated by the fact that we typically observe intervention only during periods of turbulent exchange markets. Furthermore, entering the market during these particular periods is a conscious “self-selection†choice made by the intervening central bank. We estimate the “counterfactual†exchange rate movements that allow us to determine what would have occurred in the absence of intervention and we introduce the method of propensity score matching to the intervention literature in order to estimate the “average treatment effect†(ATE) of intervention. Specifically, we estimate the ATE for daily Bank of Japan intervention over the January 1999 to March 2004 period. This sample encompasses a remarkable variation in intervention frequencies as well as unprecedented frequent intervention towards the latter part of the period. We find that the effects of intervention vary dramatically and inversely with the frequency of intervention: Intervention is effective over the 1999 to 2002 period, ineffective during 2003 and counterproductive during the first quarter of 2004.

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Bibliographic 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 qt02c028gr.

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Date of creation: 30 May 2006
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Handle: RePEc:cdl:scciec:qt02c028gr

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Web page: http://www.escholarship.org/repec/sccie/
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Keywords: Foreign Exchange Intervention; Bank of Japan; Self-Selection; Matching Methods;

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References

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  8. Fatum, Rasmus & Scholnick, Barry, 2006. "Do Exchange Rates Respond to Day-to-Day Changes in Monetary Policy Expectations When No Monetary Policy Changes Occur?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1641-1657, September.
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Cited by:
  1. Taro Esaka & Shinji Takagi, 2012. "Testing the Effectiveness of Market-Based Controls: Evidence from the Experience of Japan with Short-Term Capital Flows in the 1970s," Discussion Papers in Economics and Business 12-03, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  2. Shinji Takagi & Hiroki Okada, 2013. "Central Bank Independence and the Signaling Effect of Intervention: A Preliminary Exploration," Discussion Papers in Economics and Business 13-04, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  3. Stephen Hall & Amangeldi Kenjegaliev & P.A.V.B. Swamy & George S. Tavlas, 2013. "Measuring Currency Pressures: The Cases of the Japanese Yen, the Chinese Yuan, and the U.K. Pound," Discussion Papers in Economics 13/10, Department of Economics, University of Leicester.
  4. Fatum, Rasmus & Yamamoto, Yohei, 2014. "Large versus small foreign exchange interventions," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 114-123.
  5. Jaromir Benes & Andrew Berg & Rafael A Portillo & David Vavra, 2013. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," IMF Working Papers 13/11, International Monetary Fund.

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