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Conditional Efficacy of Sterilized Intervention

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  • Jun, Jongbyung

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    (Suffolk University, Department of Economics)

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    Abstract

    The noise-trading or coordination channel hypothesis implies that sterilized intervention in the foreign exchange market is effective if certain conditions are satisfied, but ineffective otherwise. The hypothesis is tested with a three-regime threshold model and daily data on actual intervention by US and German central banks. The main finding is that if central banks choose the optimal timing in light of the trend-chasing behaviors of noise traders, such strategic intervention is effective in moving the exchange rate in the desired direction.

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    File URL: http://192.138.214.118/RePEc/docs/wpaper/2008-1.pdf
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    Bibliographic Info

    Paper provided by Suffolk University, Department of Economics in its series Working Papers with number 2008-1.

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    Length: 17 pages
    Date of creation: 15 Jan 2008
    Date of revision:
    Handle: RePEc:suf:wpaper:2008-1

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    Web page: http://www.suffolk.edu/college/2175.html
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    Keywords: Central bank intervention; Threshold model; Coordination channel;

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    1. Bruce E. Hansen, 1996. "Sample Splitting and Threshold Estimation," Boston College Working Papers in Economics 319., Boston College Department of Economics, revised 12 May 1998.
    2. 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.
    3. Christopher J. Neely, 2000. "The practice of central bank intervention: looking under the hood," Working Papers 2000-028, Federal Reserve Bank of St. Louis.
    4. Hansen, B.E., 1991. "Inference when a Nuisance Parameter is Not Identified Under the Null Hypothesis," RCER Working Papers 296, University of Rochester - Center for Economic Research (RCER).
    5. Hung, Juann H, 1997. "Intervention strategies and exchange rate volatility: a noise trading perspective," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 779-793, September.
    6. Hansen,B.E., 1999. "Testing for linearity," Working papers 7, Wisconsin Madison - Social Systems.
    7. Rasmus Fatum & Michael Hutchison, 2002. "Effectiveness of official daily foreign exchange market intervention operations in Japan," Pacific Basin Working Paper Series 2003-01, Federal Reserve Bank of San Francisco.
    8. Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, vol. 80(2), pages 181-85, May.
    9. 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.
    10. 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.
    11. Rasmus Fatum, 2002. "Post-Plaza intervention in the DEM/USD exchange rate," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 556-567, August.
    12. Mark P. Taylor, 2004. "Is Official Exchange Rate Intervention Effective?," Economica, London School of Economics and Political Science, vol. 71, pages 1-11, 02.
    13. Mark P. Taylor, 2005. "Official Foreign Exchange Intervention As A Coordinating Signal In The Dollar-Yen Market," Pacific Economic Review, Wiley Blackwell, vol. 10(1), pages 73-82, 02.
    14. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-69, December.
    15. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
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