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A New Method for Identifying the Effects of Foreign Exchange Interventions

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Author Info

  • Chih-nan Chen

    (Research Analyst, Center for Multicultural Mental Health Research, Harvard University (cchen@chareresearch.org))

  • Tsutomu Watanabe

    (Institute of Economic Research and Research Center for Price Dynamics, Hitotsubashi University (E-mail: tsutomu.w@srv.cc.hit-u.ac.jp))

  • Tomoyoshi Yabu

    (Assistant Graduate School of Systems and Information Engineering, University of Tsukuba, and Institute for Monetary and Economic Studies, Bank of Japan (E-mail: tyabu@sk.tsukuba.ac.jp))

Abstract

The monetary authorities react even to intraday changes in the exchange rate; however, in most cases, intervention data is available only at a daily frequency. This temporal aggregation makes it difficult to identify the effects of interventions on the exchange rate. We propose a new method based on Markov Chain Monte Carlo simulations to cope with this endogeneity problem: We use "data augmentation" to obtain intraday intervention amounts and then estimate the efficacy of interventions using the augmented data. Applying this method to Japanese data, we find that an intervention of one trillion yen moves the yen/dollar rate by 1.7 percent, which is more than twice as large as the magnitude reported in previous studies applying OLS to daily observations. This shows the quantitative importance of the endogeneity problem due to temporal aggregation.

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Bibliographic Info

Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 09-E-06.

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Date of creation: Feb 2009
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Handle: RePEc:ime:imedps:09-e-06

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Keywords: Foreign exchange intervention; Intraday data; Markov-chain Monte Carlo method; Endogeneity problem; Temporal aggregation;

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References

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  1. Rasmus Fatum & Michael M. Hutchison, . "Is Sterilized Foreign Exchange Intervention Effective After All? An Event Study Approach," EPRU Working Paper Series 99-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  2. McCrorie, J.R. & Chambers, M.J., 2004. "Granger Causality and the Sampling of Economic Processes," Discussion Paper 2004-39, Tilburg University, Center for Economic Research.
  3. Eraker, Bjorn, 2001. "MCMC Analysis of Diffusion Models with Application to Finance," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 177-91, April.
  4. Almekinders, Geert J. & Eijffinger, Sylvester C. W., 1996. "A friction model of daily Bundesbank and Federal Reserve intervention," Journal of Banking & Finance, Elsevier, vol. 20(8), pages 1365-1380, September.
  5. Payne, Richard & Vitale, Paolo, 2001. "A Transaction Level Study of the Effects of Central Bank Intervention of Exchange Rates," CEPR Discussion Papers 3085, C.E.P.R. Discussion Papers.
  6. Rasmus Fatum, 2009. "Official Japanese Intervention in the JPY/USD Exchange Rate Market: Is It Effective and Through Which Channel Does It Work?," IMES Discussion Paper Series 09-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
  7. Fatum, Rasmus & Hutchison, Michael M., 2003. "Effectiveness of Official Daily Foreign Exchange Market Intervention Operations in Japan," Santa Cruz Department of Economics, Working Paper Series qt3rg5p5j2, Department of Economics, UC Santa Cruz.
  8. 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,.
  9. Christopher J. Neely, 2000. "The practice of central bank intervention: looking under the hood," Working Papers 2000-028, Federal Reserve Bank of St. Louis.
  10. Kathryn Dominguez & Jeffrey A. Frankel, 1990. "Does Foreign Exchange Intervention Work?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 16.
  11. Fratzscher, Marcel, 2005. "How successful are exchange rate communication and interventions? Evidence from time-series and event-study approaches," Working Paper Series 0528, European Central Bank.
  12. Chang, Yuanchen & Taylor, Stephen J., 1998. "Intraday effects of foreign exchange intervention by the Bank of Japan1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 191-210, February.
  13. 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.
  14. Kearns, Jonathan & Rigobon, Roberto, 2005. "Identifying the efficacy of central bank interventions: evidence from Australia and Japan," Journal of International Economics, Elsevier, vol. 66(1), pages 31-48, May.
  15. 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.
  16. Chow, Gregory C & Lin, An-loh, 1971. "Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 372-75, November.
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Cited by:
  1. Rasmus Fatum & Yohei Yamamoto, 2012. "Does foreign exchange intervention volume matter?," Globalization and Monetary Policy Institute Working Paper 115, Federal Reserve Bank of Dallas.
  2. Moura, Marcelo L. & Pereira, Fatima R. & Attuy, Guilherme de Moraes, 2013. "Currency Wars in Action: How Foreign Exchange Interventions Work in an Emerging Economy," Insper Working Papers wpe_304, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.

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