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A market microstructure analysis of foreign exchange intervention

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  • Vitale, Paolo

Abstract

We formulate a market microstructure model of exchange determination we employ to investigate the impact of foreign exchange intervention on exchange rates and on foreign exchange (FX) market conditions. With our formulation we show i) how foreign exchange intervention influences exchange rates via both a portfolio-balance and a signalling channel and ii) derive a series of testable implications which are coherent with a large body of empirical research. Our investigation also proposes some normative recommendations, as we show i) that in extreme circumstances large scale foreign exchange intervention can have destabilizing effects for the functioning of FX markets and ii) that the route chosen for the implementation of official intervention has important implications for its impact on exchange rates and on market conditions. JEL Classification: D82, G14, G15

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Paper provided by European Central Bank in its series Working Paper Series with number 0629.

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Date of creation: May 2006
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Handle: RePEc:ecb:ecbwps:20060629

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Keywords: Exchange Rate Dynamics; Foreign Exchange Micro Structure; Official Intervention; order flow;

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  1. Vitale, Paolo, 1999. "Sterilised central bank intervention in the foreign exchange market," Journal of International Economics, Elsevier, vol. 49(2), pages 245-267, December.
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Citations

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Cited by:
  1. Lukas Menkhoff, 2008. "High-Frequency Analysis of Foreign Exchange Interventions: What do we learn?," CESifo Working Paper Series 2473, CESifo Group Munich.
  2. Capraro Rodríguez Santiago & Perrotini Hernández Ignacio, 2012. "Intervenciones cambiarias esterilizadas, teoría y evidencia:el caso de México," Contaduría y Administración:Revista Internacional, Accounting and Management: International Journal, vol. 57(2), pages 11-44, abril-jun.
  3. Rasmus Fatum & Jesper Pedersen, 2007. "Real-Time Effects of Central Bank Interventions in the Euro Market," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 07-01, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.

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