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Does Foreign Exchange Intervention Signal Future Monetary Policy?

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Author Info

  • Kaminsky, G.L.
  • Lewis, K.K.

Abstract

A frequently cited explanation for why sterilized interventions may affect exchange rates is that these interventions signal central banks' future monetary policy intentions. This explanation presumes that central banks in fact back up interventions with subsequent changes in monetary policy. We empirically examine this hypothesis using data on market observations of U.S. intervention together with monetary policy variables, and exchange rates. We strongly reject the hypothesis that interventions convey no signal. However, we also find that in some episodes, intervention signaled changes in monetary policy in the opposite direction of the conventional signaling story. This finding can explain why in some periods exchange rates moved in the opposite direction of that suggested by intervention.

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Bibliographic Info

Paper provided by Wharton School - Weiss Center for International Financial Research in its series Weiss Center Working Papers with number 93-3.

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Length: 36 pages
Date of creation: 1992
Date of revision:
Handle: RePEc:fth:pennif:93-3

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Keywords: policy making ; monetary theory ; money ; exchange rate;

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References

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  1. Dominguez, K.M., 1989. "Market Responses To Coordinated Central Bank Intervention," Papers 179d, Harvard - J.F. Kennedy School of Government.
  2. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects, monetary policy and the business cycle," Working Paper Series, Macroeconomic Issues 92-15, Federal Reserve Bank of Chicago.
  3. Michael W. Klein, 1992. "The Accuracy of Reports of Foreign Exchange Intervention," NBER Working Papers 4165, National Bureau of Economic Research, Inc.
  4. Edison, H.J., 1993. "The Effectiveness of Central-Bank Intervention: A Survey of the Litterature after 1982," Princeton Studies in International Economics 18, International Economics Section, Departement of Economics Princeton University,.
  5. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects and the monetary transmission mechanism," Staff Report 150, Federal Reserve Bank of Minneapolis.
  6. Steven Strongin, 1992. "The identification of monetary policy disturbances: explaining the liquidity puzzle," Working Paper Series, Macroeconomic Issues 92-27, Federal Reserve Bank of Chicago.
  7. Graciela Kaminsky & Karen K. Lewis, 1993. "Does Foreign Exchange Intervention Signal Future Monetary Policy?," NBER Working Papers 4298, National Bureau of Economic Research, Inc.
  8. Melvin, Michael, 1983. "The Vanishing Liquidity Effect of Money on Interest: Analysis and Implications for Policy," Economic Inquiry, Western Economic Association International, vol. 21(2), pages 188-202, April.
  9. Frederic S. Mishkin, 1981. "Monetary Policy and Long-Term Interest Rates: An Efficient Markets Approach," NBER Working Papers 0517, National Bureau of Economic Research, Inc.
  10. Humpage, Owen F. & Osterberg, William P., 1992. "Intervention and the foreign exchange risk premium: An empirical investigation of daily effects," Global Finance Journal, Elsevier, vol. 3(1), pages 23-50.
  11. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  12. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
  13. Lewis, Karen K, 1995. "Are Foreign Exchange Intervention and Monetary Policy Related, and Does It Really Matter?," The Journal of Business, University of Chicago Press, vol. 68(2), pages 185-214, April.
  14. Reichenstein, William, 1987. "The Impact of Money on Short-term Interest Rates," Economic Inquiry, Western Economic Association International, vol. 25(1), pages 67-82, January.
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