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New results on the impact of central-bank intervention on deviations from uncovered interest parity

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  • Owen F. Humpage
  • William P. Osterberg

Abstract

Germany, Japan, and the United States continue to view foreign exchange intervention as an effective instrument, although the mechanism through which it operates is unclear. In this paper, we use official data on daily dollar intervention to examine its impact on exchange-rate risk premia through both the portfolio-balance and expectations channels. We define the risk premium in terms of deviation from uncovered interest parity and model its behavior using generalized autoregressive conditional heteroscedasticity. Our evidence of portfolio-balance and expectations effects is inconsistent across subperiods of different exchange-rate-policy regimes. Also, unlike Dominguez (1990) and Loopesko (1984), we find no evidence that coordination of intervention improves its efficacy.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9207.

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Date of creation: 1992
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Handle: RePEc:fip:fedcwp:9207

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Keywords: Foreign exchange - Law and legislation;

References

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  1. Backus, David K. & Kehoe, Patrick J., 1989. "On the denomination of government debt : A critique of the portfolio balance approach," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 359-376, May.
  2. Baillie, Richard T & Bollerslev, Tim, 1989. "The Message in Daily Exchange Rates: A Conditional-Variance Tale," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(3), pages 297-305, July.
  3. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-53, March.
  4. Warren E. Weber, 1986. "Do sterilized interventions affect exchange rates?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 14-23.
  5. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  6. Lastrapes, William D, 1989. "Exchange Rate Volatility and U.S. Monetary Policy: An ARCH Application," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 66-77, February.
  7. Jeffrey A. Frankel & Kenneth A. Froot, 1987. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
  8. Loopesko, Bonnie E., 1984. "Relationships among exchange rates, intervention, and interest rates: An empirical investigation," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 257-277, December.
  9. Robert E. Cumby, 1987. "Is it Risk? Explaining Deviations from Uncovered Interest Parity," NBER Working Papers 2380, National Bureau of Economic Research, Inc.
  10. Owen F. Humpage, 1988. "Intervention and the dollar's decline," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-16.
  11. Giovannini, Alberto & Jorion, Philippe, 1989. " The Time Variation of Risk and Return in the Foreign Exchange and Stock Markets," Journal of Finance, American Finance Association, vol. 44(2), pages 307-25, June.
  12. Lyons, Richard K., 1988. "Tests of the foreign exchange risk premium using the expected second moments implied by option pricing," Journal of International Money and Finance, Elsevier, vol. 7(1), pages 91-108, March.
  13. William P. Osterberg, 1989. "Intervention and the risk premium in foreign exchange rates," Working Paper 8908, Federal Reserve Bank of Cleveland.
  14. Domowitz, Ian & Hakkio, Craig S., 1985. "Conditional variance and the risk premium in the foreign exchange market," Journal of International Economics, Elsevier, vol. 19(1-2), pages 47-66, August.
  15. Hali J. Edison, 1990. "Foreign currency operations: an annotated bibliography," International Finance Discussion Papers 380, Board of Governors of the Federal Reserve System (U.S.).
  16. McCurdy, Thomas H & Morgan, Ieuan G, 1988. "Testing the Martingale Hypothesis in Deutsche Mark Futures with Models Specifying the Form of Heteroscedasticity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(3), pages 187-202, July-Sept.
  17. Charles Engel & Anthony P. Rodrigues, 1987. "Tests of International CAPM with Time-Varying Covariances," NBER Working Papers 2303, National Bureau of Economic Research, Inc.
  18. McFarland, James W & Pettit, R Richardson & Sung, Sam K, 1987. " The Distribution of Foreign Exchange Price Changes: Trading Day Effects and Risk Measurement--A Reply," Journal of Finance, American Finance Association, vol. 42(1), pages 189-94, March.
  19. Mark, Nelson C., 1988. "Time-varying betas and risk premia in the pricing of forward foreign exchange contracts," Journal of Financial Economics, Elsevier, vol. 22(2), pages 335-354, December.
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