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The Signalling Channel of Central Bank Interventions: Modelling the Yen / US Dollar Exchange Rate

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  • Yu-Fu Chen
  • Michael Funke
  • Nicole Glanemann

Abstract

This paper presents a theoretical framework analysing the signalling channel of exchange rate interventions as an informational trigger. We develop an implicit target zone framework with learning in order to model the signalling channel. The theoretical premise of the model is that interventions convey signals that communicate information about the exchange rate objectives of central bank. The model is used to analyse the impact of Japanese FX interventions during the period 1999 -2011 on the yen/US dollar dynamics.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-10/cesifo1_wp3610.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3610.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3610

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Keywords: exchange rates; interventions; Japan;

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  1. Cheung, Yin-Wong & Chinn, Menzie David, 2001. "Currency traders and exchange rate dynamics: a survey of the US market," Journal of International Money and Finance, Elsevier, Elsevier, vol. 20(4), pages 439-471, August.
  2. Chen, Yu-Fu & Funke, Michael & Glanemann, Nicole, 2010. "Off-the-Record Target Zones: Theory with an Application to Hong Kongs Currency Board," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-38, Scottish Institute for Research in Economics (SIRE).
  3. Fabian Reeves, Silke, 1998. "Partial Credibility, Information Selection and the Signalling Channel of Sterilized Interventions," Journal of Economic Integration, Center for Economic Integration, Sejong University, Center for Economic Integration, Sejong University, vol. 13, pages 108-130.
  4. Kathryn M. E. Dominguez & Freyan Panthaki, 2007. "The influence of actual and unrequited interventions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(2), pages 171-200.
  5. Fratzscher, Marcel, 2004. "Communication and exchange rate policy," Working Paper Series, European Central Bank 0363, European Central Bank.
  6. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
  7. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, Elsevier, vol. 14(1), pages 71-100, March.
  8. Lukas Menkhoff, 2010. "High-Frequency Analysis Of Foreign Exchange Interventions: What Do We Learn?," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 24(1), pages 85-112, 02.
  9. Bhattacharya, Utpal & Weller, Paul, 1997. "The advantage to hiding one's hand: Speculation and central bank intervention in the foreign exchange market," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(2), pages 251-277, July.
  10. Kenneth A. Froot & Maurice Obstfeld, 1992. "Exchange Rate Dynamics Under Stochastic Regime Shifts: A Unified Approach," NBER Working Papers 2835, National Bureau of Economic Research, Inc.
  11. Paul Soderlind & Lars E. O. Svensson, 1997. "New Techniques to Extract Market Expectations from Financial Instruments," NBER Working Papers 5877, National Bureau of Economic Research, Inc.
  12. Michael Funke & Yu-Fu Chen & Nicole Glanemann, 2010. "Off-the-record target zones: Theory with an application to Hong Kong's currency board," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 21006, Hamburg University, Department of Economics.
  13. Klein, Michael W., 1992. "Big effects of small interventions: The informational role of intervention in exchange rate policy," European Economic Review, Elsevier, Elsevier, vol. 36(4), pages 915-924, May.
  14. Iannizzotto, Matteo & Taylor, Mark P, 1999. "The Target Zone Model, Non-linearity and Mean Reversion: Is the Honeymoon Really Over?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(454), pages C96-110, March.
  15. Menkhoff, L., 1998. "The noise trading approach -- questionnaire evidence from foreign exchange," Journal of International Money and Finance, Elsevier, Elsevier, vol. 17(3), pages 547-564, June.
  16. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
  17. Takatoshi Ito & Tomoyoshi Yabu, 2004. "What Prompts Japan to Intervene in the Forex Market? A New Approach to a Reaction Function," NBER Working Papers 10456, National Bureau of Economic Research, Inc.
  18. Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1, July.
  19. Baillie, Richard T. & Humpage, Owen F. & Osterberg, William P., 2000. "Intervention from an information perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 10(3-4), pages 407-421, December.
  20. Hall, Yosuke & Kim, Suk-Joong, 2009. "What drives Yen interventions in Tokyo?: Do off-shore foreign exchange markets matter more than Tokyo market?," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 17(2), pages 175-188, April.
  21. Jacob A. Frenkel & Morris Goldstein, 1986. "A Guide to Target Zones," NBER Working Papers 2113, National Bureau of Economic Research, Inc.
  22. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 19(1), pages 69-90, September.
  23. Kristian Stegenborg Larsen & Michael Sørensen, 2007. "Diffusion Models For Exchange Rates In A Target Zone," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 17(2), pages 285-306.
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