Is Sterilized Foreign Exchange Intervention Effective After All? An Event Study Approach
AbstractCentral banks actively engage in sterilized foreign exchange market intervention despite numerous empirical studies indicating that these operations do not systematically affect the exchange rate. Are these policies misguided and central bankers irrational? Or is evidence showing the effectiveness of sterilized intervention being overlooked? This paper argues the latter, providing evidence on the effectiveness of sterilized intervention using an event study approach linking intervention with systematic exchange rate changes. We argue that this is an important methodological innovation since studies using time-series techniques are limited by the nature of the data: intense and sporadic bursts of intervention activity juxtaposed against exchange rates that change almost continuously on a daily basis. The event study framework used in standard finance studies, by contrast, is ideally suited to this circumstance. Focusing on daily US official intervention operations, we identify separate intervention “episodes” and analyze the subsequent effect on the exchange rate. Using the matched-sample mean test and the non-parametric sign test of the median, we find strong evidence that sterilized intervention systemically affects the exchange rate. These results are especially strong when episodes are distinguished by the intervention currency, the form of intervention (sales or purchases of foreign exchange), and exchange rate developments immediately prior to the intervention activity.
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Bibliographic InfoPaper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 99-09.
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Other versions of this item:
- 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.
- NEP-ALL-2003-05-08 (All new papers)
- NEP-IFN-2003-05-08 (International Finance)
- NEP-RMG-2003-05-08 (Risk Management)
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