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Central Bank Independence and the Signaling Effect of Intervention: A Preliminary Exploration

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  • Shinji Takagi

    ()
    (Graduate School of Economics, Osaka University)

  • Hiroki Okada

    ()
    (Graduate School of Economics, Osaka University)

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    Abstract

    This note explores the signaling effect of foreign exchange market intervention in countries, such as Japan, the United Kingdom and the United States, where separate agencies are responsible for intervention and monetary policy. An important part of the signaling effect operates when an entity conducting intervention makes a credible commitment to a change in future monetary policy, suggesting that its effectiveness hinges upon whether the central bank is independent of government oversight. We test this conjecture by comparing the consistency of intervention and future monetary policy in Japan before and after April 1998, when central bank independence was established by the new Bank of Japan Law. As expected, the signaling effect of intervention weakened after the central bank became independent.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1304.pdf
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    Bibliographic Info

    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 13-04.

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    Length: 13 pages
    Date of creation: Mar 2013
    Date of revision:
    Handle: RePEc:osk:wpaper:1304

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Related research

    Keywords: foreign exchange market intervention; Japanese intervention; central bank independence; signaling effect of intervention;

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    1. Rasmus Fatum & Michael M. Hutchison, 2006. "Evaluating Foreign Exchange Market Intervention: Self-Selection, Counterfactuals and Average Treatment Effects," EPRU Working Paper Series 06-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    2. 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.
    3. Takatoshi Ito, 2007. "Myths and reality of foreign exchange interventions: an application to Japan," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 133-154.
    4. Kim, Suk-Joong & Sheen, Jeffrey, 2006. "Interventions in the Yen-dollar spot market: A story of price, volatility and volume," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3191-3214, November.
    5. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
    6. Paolo Vitale, 2007. "An assessment of some open issues in the analysis of foreign exchange intervention," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 155-170.
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