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An analysis of recent studies of the effect of foreign exchange intervention

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Christopher J. Neely

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Abstract

Two recent strands of research have contributed to our understanding of the effects of foreign exchange intervention: 1) the use of high frequency data; 2) the use of event studies to evaluate the effects of intervention. This article surveys recent empirical studies of the effect of foreign exchange intervention and analyzes the implicit assumptions and limitations of such work. After explicitly detailing such drawbacks, the paper suggests ways to better investigate the effects of intervention.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-030.

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Date of creation: 2005
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Publication status: Published in Federal Reserve Bank of St. Louis Review, November/December 2005, 87(6), pp. 685-717
Handle: RePEc:fip:fedlwp:2005-030

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Keywords: Foreign exchange Time-series analysis

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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. Kim, Suk-Joong & Kortian, Tro & Sheen, Jeffrey, 2000. "Central bank intervention and exchange rate volatility -- Australian evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 381-405, December. [Downloadable!] (restricted)
    Other versions:
  2. Christopher J. Neely, 2006. "Identifying the effects of U.S. intervention on the levels of exchange rates," Working Papers 2005-031, Federal Reserve Bank of St. Louis. [Downloadable!]
  3. Lucio Sarno & Mark P. Taylor, 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. [Downloadable!] (restricted)
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  4. Owen F. Humpage, 1984. "Dollar intervention and the deutschemark-dollar exchange rate: a daily time-series model," Working Paper 8404, Federal Reserve Bank of Cleveland. [Downloadable!]
  5. Gabriele Galati & Piti Disyatat, 2005. "The effectiveness of foreign exchange intervention in emerging market countries: evidence from the Czech koruna," BIS Working Papers 172, Bank for International Settlements. [Downloadable!]
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  6. Kathryn M.E. Dominguez, 2003. "When Do Central Bank Interventions Influence Intra-Daily and Longer-Term Exchange Rate Movements?," NBER Working Papers 9875, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Ana Maria Herrera & Pinar Ozbay, 2005. "A Dynamic Model of Central Bank Intervention," Working Papers 0501, Research and Monetary Policy Department, Central Bank of the Republic of Turkey. [Downloadable!]
  8. Ramana Ramaswamy & Hossein Samiei, 2000. "The Yen-Dollar Rate - Have Interventions Mattered?," IMF Working Papers 00/95, International Monetary Fund.
  9. Rasmus Fatum & Michael Hutchison, 2003. "Effectiveness of Official Daily Foreign Exchange Market Intervention Operations in Japan," NBER Working Papers 9648, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Christopher J. Neely, 2002. "The temporal pattern of trading rule returns and central bank intervention: intervention does not generate technical trading rule profits," Working Papers 2000-018, Federal Reserve Bank of St. Louis. [Downloadable!]
  11. Beine, Michel & Laurent, Sebastien, 2003. "Central bank interventions and jumps in double long memory models of daily exchange rates," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 641-660, December. [Downloadable!] (restricted)
  12. Frenkel, Michael & Pierdzioch, Christian & Stadtmann, Georg, 2005. "The effects of Japanese foreign exchange market interventions on the yen/U.S. dollar exchange rate volatility," International Review of Economics & Finance, Elsevier, vol. 14(1), pages 27-39. [Downloadable!] (restricted)
  13. Michel Beine & Charles S. Bos & Sebastian Laurent, 2005. "The Impact of Central Bank FX Interventions on Currency Components," Tinbergen Institute Discussion Papers 05-103/4, Tinbergen Institute. [Downloadable!]
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  14. Neil, Beattie & Fillion, Jean-François, 1999. "An Intraday Analysis of the Effectiveness of Foreign Exchange Intervention," Working Papers 99-4, Bank of Canada. [Downloadable!]
  15. Rasmus Fatum, 2005. "Daily Effects of Foreign Exchange Intervention: Evidence from Official Bank of Canada Data," EPRU Working Paper Series 05-07, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  16. Rasmus Fatum & Michael R. King, 2005. "Rules versus Discretion in Foreign Exchange Intervention: Evidence from Official Bank of Canada High-Frequency Data," EPRU Working Paper Series 05-06, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
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  17. Hali J. Edison & Paul Cashin & Hong Liang, 2003. "Foreign Exchange Intervention and the Australian Dollar: Has it Mattered?," IMF Working Papers 03/99, International Monetary Fund. [Downloadable!]
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  18. Dominguez, Kathryn M. E., 2003. "The market microstructure of central bank intervention," Journal of International Economics, Elsevier, vol. 59(1), pages 25-45, January. [Downloadable!] (restricted)
  19. Beine,M. & Palm,F.C. & Laurent,S., 2003. "Central Bank Forex Interventions Assessed Using Realized Moments," Research Memoranda 057, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  20. Jonathan Kearns & Roberto Rigobon, 2002. "Identifying the Efficacy of Central Bank Interventions: The Australian Case," NBER Working Papers 9062, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  21. Humpage, Owen F., 2000. "The United States as an informed foreign-exchange speculator," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 287-302, December. [Downloadable!] (restricted)
  22. Leahy, Michael P, 1995. "The profitability of US intervention in the foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 14(6), pages 823-844, December. [Downloadable!] (restricted)
  23. Christopher J. Neely, 2005. "Using implied volatility to measure uncertainty about interest rates," Review, Federal Reserve Bank of St. Louis, issue May, pages 407-425. [Downloadable!]
  24. Kim, Soyoung, 2003. "Monetary policy, foreign exchange intervention, and the exchange rate in a unifying framework," Journal of International Economics, Elsevier, vol. 60(2), pages 355-386, August. [Downloadable!] (restricted)
  25. Christopher J. Neely, 1998. "Technical analysis and the profitability of U.S. foreign exchange intervention," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 3-17. [Downloadable!]
  26. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1, pages 19-46. [Downloadable!] (restricted)
  27. Eric Hillebrand & Gunther Schnabl, 2004. "The Effects of Japanese Foreign Exchange Intervention: GARCH Estimation and Change Point Detection," International Finance 0410008, EconWPA. [Downloadable!]
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  28. Olli Castrén, 2004. "Do options-implied RND functions on G3 currencies move around the times of interventions on the JPY/USD exchange rate?," Working Paper Series 410, European Central Bank. [Downloadable!]
  29. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-29, October.
  30. 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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  31. Michael Frenkel & Christian Pierdzioch & Georg Stadtmann, 2003. "The Effects of Japanese Foreign Exchange Market Interventions on the Yen/U.S. Dollar Exchange Rate Volatility," Kiel Working Papers 1165, Kiel Institute for the World Economy. [Downloadable!]
  32. Sam Y. Cross, . "All about the foreign exchange market in the United States," Monograph, Federal Reserve Bank of New York, number 1998aatfemitu.
  33. Roberto Rigobon & Brian Sack, 2003. "Measuring The Reaction Of Monetary Policy To The Stock Market," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 639-669, May. [Downloadable!] (restricted)
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  34. Humpage, Owen F, 1999. "U.S. Intervention: Assessing the Probability of Success," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 731-47, November.
  35. Fratzscher, Marcel, 2006. "On the long-term effectiveness of exchange rate communication and interventions," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 146-167, February. [Downloadable!] (restricted)
  36. 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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  37. 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)
  38. Payne, Richard & Vitale, Paolo, 2003. "A transaction level study of the effects of central bank intervention on exchange rates," Journal of International Economics, Elsevier, vol. 61(2), pages 331-352, December. [Downloadable!] (restricted)
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  39. Owen F. Humpage, 1994. "Institutional aspects of U.S. intervention," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 2-19. [Downloadable!]
  40. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April. [Downloadable!] (restricted)
  41. Aguilar, Javiera & Nydahl, Stefan, 2000. "Central bank intervention and exchange rates: the case of Sweden," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 303-322, December. [Downloadable!] (restricted)
  42. repec:rus:hseeco:21608 is not listed on IDEAS
  43. Mark P. Taylor, 2004. "Is Official Exchange Rate Intervention Effective?," Economica, London School of Economics and Political Science, vol. 71, pages 1-11, 02. [Downloadable!] (restricted)
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  44. Rasmus Fatum & Michael M. Hutchison, 2003. "Is sterilised foreign exchange intervention effective after all? an event study approach," Economic Journal, Royal Economic Society, vol. 113(487), pages 390-411, 04. [Downloadable!] (restricted)
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  45. James Tobin, 1956. "Estimation of Relationships for Limited Dependent Variables," Cowles Foundation Discussion Papers 3R, Cowles Foundation, Yale University. [Downloadable!]
  46. Christian Pierdzioch & Georg Stadtmann, 2004. "The Effectiveness of the Interventions of the Swiss National Bank - An Event-Study Analysis," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(II), pages 229-244, June. [Downloadable!]
  47. Campa, Jose Manuel & Chang, P. H. Kevin, 1998. "The forecasting ability of correlations implied in foreign exchange options," Journal of International Money and Finance, Elsevier, vol. 17(6), pages 855-880, December. [Downloadable!] (restricted)
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  48. Rasmus Fatum, 2002. "Post-Plaza intervention in the DEM/USD exchange rate," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 556-567, August. [Downloadable!] (restricted)
Full references

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. Oscar Bernal, 2006. "Do interactions between political authorities and central banks influence FX interventions? Evidence from Japan," Working Papers DULBEA 06-03.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
  2. Balazs Egert & Lubos Komarek, 2005. "Foreign Exchange Interventions and Interest Rate Policy in the Czech Republic: Hand in Glove?," Working Papers 2005/07, Czech National Bank, Research Department. [Downloadable!]
    Other versions:
  3. Rasmus Fatum & Jesper Pedersen, 2007. "Real-Time Effects of Central Bank Interventions in the Euro Market," EPRU Working Paper Series 07-01, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  4. Reitz, Stefan & Taylor, Mark P., 2006. "The coordination channel of foreign exchange intervention: a nonlinear microstructural analysis," Discussion Paper Series 1: Economic Studies 2006,08, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  5. Gabriele Galati & Patrick Higgins & Owen F. Humpage & William Melick, 2006. "Option prices, exchange market intervention, and the higher moment expectations channel: a user’s guide," Working Paper 0618, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  6. Christopher J. Neely, 2006. "Identifying the effects of U.S. intervention on the levels of exchange rates," Working Papers 2005-031, Federal Reserve Bank of St. Louis. [Downloadable!]
  7. Adam Geršl, 2006. "Testing the Effectiveness of the Czech National Bank’s Foreign-Exchange Interventions," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 56(09-10), pages 398-415, September. [Downloadable!]
  8. Takatoshi Ito, 2007. "Myths and reality of foreign exchange interventions: an application to Japan," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 133-154. [Downloadable!]
  9. John Pippenger, 2007. "How should we think about markets for foreign exchange?," University of California at Santa Barbara, Economics Working Paper Series 16-07, Department of Economics, UC Santa Barbara. [Downloadable!]
  10. Sarantis Kalyvitis & Ifigeneia Skotida, 2008. "Some Empirical Evidence on the Effects of U.S. Monetary Policy Shocks on Cross Exchange Rates," Working Papers 65, Bank of Greece. [Downloadable!]
  11. Rasmus Fatum, 2005. "Daily Effects of Foreign Exchange Intervention: Evidence from Official Bank of Canada Data," EPRU Working Paper Series 05-07, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  12. Rasmus Fatum & Michael M. Hutchison, 2006. "Evaluating Foreign Exchange Market Intervention: Self-Selection, Counterfactuals and Average Treatment Effects," EPRU Working Paper Series 06-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  13. Viera Chemlarova & Gunter Schnabl, 2006. "Exchange rate stabilization in developed and underdeveloped capital markets," Working Paper Series 636, European Central Bank. [Downloadable!]
  14. Pierre L. Siklos & Diana N. Weymark, 2007. "Is Sterilized Intervention Effective? New International Evidence," Working Papers 142007, Hong Kong Institute for Monetary Research. [Downloadable!]
  15. Post, Erik, 2006. "Foreign exchange market interventions as monetary policy," Working Paper Series 2006:21, Uppsala University, Department of Economics. [Downloadable!]
  16. Seok Gil Park, 2007. "Solving Endogeneity in Assessing the Efficacy of Foreign Exchange Market Interventions," Caepr Working Papers 2007-004, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
  17. Michel Beine & Jérôme Lahaye & Sébastien Laurent & Christopher J. Neely & Franz C. Palm, 2007. "Central bank intervention and exchange rate volatility, its continuous and jump components," Working Papers 2006-031, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  18. Eric Hillebrand & Gunther Schnabl, 2006. "A structural break in the effects of Japanese foreign exchange intervention on yen/dollar exchange rate volatility," Working Paper Series 650, European Central Bank. [Downloadable!]
  19. Vitale, Paolo, 2006. "A Critical Appraisal of Recent Developments in the Analysis of Foreign Exchange Intervention," CEPR Discussion Papers 5729, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  20. Li-gang Liu & Laurent Pauwels & Jun-yu Chan, 2008. "Do External Political Pressures Affect the Renminbi Exchange Rate?," Working Papers 0805, Hong Kong Monetary Authority. [Downloadable!]
  21. Stefan Reitz & M.P Taylor, 2006. "The Coordination Channel of Foreign Exchange Intervention," Computing in Economics and Finance 2006 16, Society for Computational Economics. [Downloadable!]
  22. 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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