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Rules versus Discretion in Foreign Exchange Intervention: Evidence from Official Bank of Canada High-Frequency Data

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Author Info

  • Rasmus Fatum

    (School of Business, University of Alberta)

  • Michael R. King

    (Financial Markets Department, Bank of Canada, Ottawa)

Abstract

This paper analyzes official, high-frequency Bank of Canada intervention and exchange rate data (the latter quoted at the end of every 5-minute interval over every 24-hour period) over the January 1995 to September 1998 time-period. The data is of particular interest as it spans over two distinctly different intervention regimes – one characterized by purely rules-based (“mechanistic”) intervention versus one characterized by both rules-based and discretionary intervention. This unique feature of the data allows for both a comparison of the effects of rules-based version discretionary intervention and a general investigation of intraday effects of intervention. Employing an event-study methodology and three different criteria for success, the study presents strong evidence showing that intervention systematically affects movements in the CAD/USD and in the desired direction along with some evidence that intervention is associated with a reduction of exchange rate volatility. Interestingly, there is no indication that discretionary intervention is more effective than rules-based intervention.

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Bibliographic Info

Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 05-06.

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Length: 24 pages
Date of creation: May 2005
Date of revision:
Handle: RePEc:kud:epruwp:05-06

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Related research

Keywords: foreign exchange intervention; intraday data; event studies; currency co-movement;

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Cited by:
  1. Michael Melvin & Lukas Menkhoff & Maik Schmeling, 2008. "Automating Exchange Rate Target Zones: Intervention via an Electronic Limit Order Book," CESifo Working Paper Series 2221, CESifo Group Munich.
  2. Lukas Menkhoff, 2008. "High-Frequency Analysis of Foreign Exchange Interventions: What do we learn?," CESifo Working Paper Series 2473, CESifo Group Munich.
  3. Christopher J. Neely, 2007. "Central bank authorities’ beliefs about foreign exchange intervention," Working Papers 2006-045, Federal Reserve Bank of St. Louis.
  4. Melvin, Michael & Menkhoff, Lukas & Schmeling, Maik, 2009. "Exchange rate management in emerging markets: Intervention via an electronic limit order book," Journal of International Economics, Elsevier, vol. 79(1), pages 54-63, September.

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