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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
4298.
Length: Date of creation: Mar 1993 Date of revision: Publication status: published as Journal of Monetary Policy, April, 1996, vol.37, pp.285-312. Handle: RePEc:nbr:nberwo:4298
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Find related papers by JEL classification: F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
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