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The advantage of hiding both hands : Foreign exchange intervention, ambiguity and private information

Author

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  • Eijffinger, S.C.W.

    (Tilburg University, School of Economics and Management)

  • Verhagen, W.H.

Abstract

This paper analyzes a dynamic exchange rate policy game in which the central bank has private information about its short-term exchange rate target, on the one hand, and in which the market is faced with a certain degree of ambiguity concerning the actual intervention volume, on the other. Sterilized interventions are shown to derive their effectiveness from the fact that they transmit information about the short-term exchange rate target to the market. In this respect, we provide an explanation for the presumed inconsistency between intervention secrecy and the effectiveness of the signalling channel since our model predicts that interventions will be more effective on average if the central bank retains some degree of ambiguity. Moreover, it is also shown that sterilized interventions will not exert a lasting effect on the exchange rate. Finally, we have also investigated the extent to which some political and economic parameters determine the size of the intervention bias.
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Suggested Citation

  • Eijffinger, S.C.W. & Verhagen, W.H., 1998. "The advantage of hiding both hands : Foreign exchange intervention, ambiguity and private information," Other publications TiSEM 837fdab8-0c40-4b86-838c-5, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:837fdab8-0c40-4b86-838c-5d9da2af13f5
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    Cited by:

    1. Dominguez, Kathryn M., 1998. "Central bank intervention and exchange rate volatility1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 161-190, February.
    2. Peter Brandner & Harald Grech, 2002. "Why did Central Banks Intervene in the EMS? The Post 1993 Experience," Working Papers 77, Oesterreichische Nationalbank (Austrian Central Bank).
    3. Barnett, Richard C. & Ozerturk, Saltuk, 2007. "The advantage of showing your hand selectively in foreign exchange interventions," European Journal of Political Economy, Elsevier, vol. 23(1), pages 228-244, March.
    4. Bofinger, Peter, 2000. "A framework for stabilizing the euro/yen/dollar triplet," The North American Journal of Economics and Finance, Elsevier, vol. 11(2), pages 137-151, December.
    5. Zoe McLaren, 2002. "The Effectiveness Of Reserve Bank Of Australia Foreign Exchange Intervention," Department of Economics - Working Papers Series 849, The University of Melbourne.

    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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