IDEAS home Printed from https://ideas.repec.org/a/aea/aejmac/v11y2019i1p132-56.html
   My bibliography  Save this article

When Is Foreign Exchange Intervention Effective? Evidence from 33 Countries

Author

Listed:
  • Marcel Fratzscher
  • Oliver Gloede
  • Lukas Menkhoff
  • Lucio Sarno
  • Tobias Stöhr

Abstract

This paper examines foreign exchange intervention based on novel daily data covering 33 countries from 1995 to 2011. We find that intervention is widely used and an effective policy tool, with a success rate in excess of 80 percent under some criteria. The policy works well in terms of smoothing the path of exchange rates, and in stabilizing the exchange rate in countries with narrow band regimes. Moving the level of the exchange rate in flexible regimes requires that some conditions are met, including the use of large volumes and that intervention is made public and supported via communication.

Suggested Citation

  • Marcel Fratzscher & Oliver Gloede & Lukas Menkhoff & Lucio Sarno & Tobias Stöhr, 2019. "When Is Foreign Exchange Intervention Effective? Evidence from 33 Countries," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(1), pages 132-156, January.
    • Handle: RePEc:aea:aejmac:v:11:y:2019:i:1:p:132-56
    Note: DOI: 10.1257/mac.20150317
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/mac.20150317
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/attachments?retrieve=IFrH9cXG_M6E57HAY0xxmhgVMgDN1C3p
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/attachments?retrieve=DZVlYLazuIa-XMvPS5SoZIPaqJa-7X0L
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/attachments?retrieve=JYGsT00N1qOU4D_9BUeSqH5hvGAxYUo9
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    2. Égert, Balázs & Kočenda, Evžen, 2014. "The impact of macro news and central bank communication on emerging European forex markets," Economic Systems, Elsevier, vol. 38(1), pages 73-88.
    3. Daude, Christian & Levy Yeyati, Eduardo & Nagengast, Arne J., 2016. "On the effectiveness of exchange rate interventions in emerging markets," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 239-261.
    4. Lukas Menkhoff, 2013. "Foreign Exchange Intervention in Emerging Markets: A Survey of Empirical Studies," The World Economy, Wiley Blackwell, vol. 36(9), pages 1187-1208, September.
    5. Benjamin Born & Michael Ehrmann & Marcel Fratzscher, 2014. "Central Bank Communication on Financial Stability," Economic Journal, Royal Economic Society, vol. 124(577), pages 701-734, June.
    6. repec:pri:cepsud:161blinder is not listed on IDEAS
    7. Burkhard, Lukas & Fischer, Andreas M., 2009. "Communicating policy options at the zero bound," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 742-754, September.
    8. Neely, Christopher J., 2008. "Central bank authorities' beliefs about foreign exchange intervention," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 1-25, February.
    9. Charles Engel & Nelson C. Mark & Kenneth D. West, 2008. "Exchange Rate Models Are Not as Bad as You Think," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 381-441, National Bureau of Economic Research, Inc.
    10. Anna Schwartz, 2000. "The Rise and Fall of Foreign Exchange Market Intervention as a Policy Tool," Journal of Financial Services Research, Springer;Western Finance Association, vol. 18(2), pages 319-339, December.
    11. Reinhart, Carmen, 2002. "A Modern History of Exchange Rate Arrangements: The Country Histories, 1946-2001," MPRA Paper 13191, University Library of Munich, Germany.
    12. Levy-Yeyati, Eduardo & Sturzenegger, Federico & Gluzmann, Pablo Alfredo, 2013. "Fear of appreciation," Journal of Development Economics, Elsevier, vol. 101(C), pages 233-247.
    13. Fratzscher, Marcel, 2009. "How successful is the G7 in managing exchange rates?," Journal of International Economics, Elsevier, vol. 79(1), pages 78-88, September.
    14. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 1-48.
    15. Fatum, Rasmus, 2015. "Foreign exchange intervention when interest rates are zero: Does the portfolio balance channel matter after all?," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 185-199.
    16. Fischer, Andreas M., 2006. "On the inadequacy of newswire reports for empirical research on foreign exchange interventions," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1226-1240, December.
    17. Humpage, Owen F, 1999. "U.S. Intervention: Assessing the Probability of Success," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 731-747, November.
    18. Payne, Richard & Vitale, Paolo, 2003. "A transaction level study of the effects of central bank intervention on exchange rates," Journal of International Economics, Elsevier, vol. 61(2), pages 331-352, December.
    19. Madhusudan Mohanty & Bat-el Berger, 2013. "Central bank views on foreign exchange intervention," BIS Papers chapters, in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 73, pages 55-74, Bank for International Settlements.
    20. Madhusudan Mohanty, 2013. "Market volatility and foreign exchange intervention in EMEs: what has changed?," BIS Papers chapters, in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 73, pages 01-10, Bank for International Settlements.
    21. Anna J. Schwartz, 2000. "The Rise and Fall of Foreign Exchange Market Intervention," NBER Working Papers 7751, National Bureau of Economic Research, Inc.
    22. Fatum, Rasmus & Hutchison, Michael M., 2010. "Evaluating foreign exchange market intervention: Self-selection, counterfactuals and average treatment effects," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 570-584, April.
    23. Gustavo Adler & Mr. Camilo E Tovar Mora, 2011. "Foreign Exchange Intervention: A Shield Against Appreciation Winds?," IMF Working Papers 2011/165, International Monetary Fund.
    24. Kathryn M.E. Dominguez & Rasmus Fatum & Pavel Vacek, 2013. "Do Sales of Foreign Exchange Reserves Lead to Currency Appreciation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(5), pages 867-890, August.
    25. Barbara Rossi, 2013. "Exchange Rate Predictability," Journal of Economic Literature, American Economic Association, vol. 51(4), pages 1063-1119, December.
    26. Olivier Jeanne & Romain Rancière, 2011. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," Economic Journal, Royal Economic Society, vol. 121(555), pages 905-930, September.
    27. Xavier Gabaix & Matteo Maggiori, 2015. "International Liquidity and Exchange Rate Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(3), pages 1369-1420.
    28. Vitale, Paolo, 2003. "Foreign exchange intervention: how to signal policy objectives and stabilise the economy," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 841-870, May.
    29. Marcel Fratzscher, 2008. "Oral Interventions Versus Actual Interventions in Fx Markets - An Event-Study Approach," Economic Journal, Royal Economic Society, vol. 118(530), pages 1079-1106, July.
    30. 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, April.
    31. Mark, Nelson C. & Sul, Donggyu, 2001. "Nominal exchange rates and monetary fundamentals: Evidence from a small post-Bretton woods panel," Journal of International Economics, Elsevier, vol. 53(1), pages 29-52, February.
    32. Olivier Blanchard & Gustavo Adler & Irineu de Carvalho Filho, 2015. "Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?," NBER Working Papers 21427, National Bureau of Economic Research, Inc.
    33. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2003. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," American Economic Review, American Economic Association, vol. 93(1), pages 38-62, March.
    34. Edison, H.J., 1993. "The Effectiveness of Central-Bank Intervention: A Survey of the Litterature after 1982," Princeton Studies in International Economics 18, International Economics Section, Departement of Economics Princeton University,.
    35. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    36. Dominguez, Kathryn M. E., 2003. "The market microstructure of central bank intervention," Journal of International Economics, Elsevier, vol. 59(1), pages 25-45, January.
    37. Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Review, Federal Reserve Bank of St. Louis, vol. 87(Nov), pages 685-718.
    38. Adler, Gustavo & Lisack, Noëmie & Mano, Rui C., 2019. "Unveiling the effects of foreign exchange intervention: A panel approach," Emerging Markets Review, Elsevier, vol. 40(C), pages 1-1.
    39. 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.
    40. Lukas Menkhoff, 2010. "High‐Frequency Analysis Of Foreign Exchange Interventions: What Do We Learn?," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 85-112, February.
    41. repec:mcb:jmoncb:v:45:y:2013:i::p:867-890 is not listed on IDEAS
    42. Bank for International Settlements, 2013. "Market volatility and foreign exchange intervention in EMEs: what has changed?," BIS Papers, Bank for International Settlements, number 73.
    43. Fatum, Rasmus & Yamamoto, Yohei, 2014. "Large versus small foreign exchange interventions," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 114-123.
    44. 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 1356-1369, December.
    45. Fischer, Andreas M & Zurlinden, Mathias, 1999. "Exchange Rate Effects of Central Bank Interventions: An Analysis of Transaction Prices," Economic Journal, Royal Economic Society, vol. 109(458), pages 662-676, October.
    46. Eichengreen, Barry, 2013. "Currency war or international policy coordination?," Journal of Policy Modeling, Elsevier, vol. 35(3), pages 425-433.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jeffrey Frankel, 2021. "Systematic Managed Floating," World Scientific Book Chapters, in: Steven J Davis & Edward S Robinson & Bernard Yeung (ed.), THE ASIAN MONETARY POLICY FORUM Insights for Central Banking, chapter 5, pages 160-221, World Scientific Publishing Co. Pte. Ltd..
    2. Milan Nedeljkovic & Christian Saborowski, 2019. "The Relative Effectiveness of Spot and Derivatives‐Based Intervention," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(6), pages 1455-1490, September.
    3. Chang, Mei-Ching & Suardi, Sandy & Chang, Yuanchen, 2017. "Foreign exchange intervention in Asian countries: What determine the odds of success during the credit crisis?," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 370-390.
    4. Lukas Menkhoff & Malte Rieth & Tobias Stohr, 2021. "The Dynamic Impact of FX Interventions on Financial Markets," The Review of Economics and Statistics, MIT Press, vol. 103(5), pages 939-953, December.
    5. Alain Naef, 2020. "Blowing against the Wind? A Narrative Approach to Central Bank Foreign Exchange Intervention," Working Papers 0188, European Historical Economics Society (EHES).
    6. Andrew Filardo & Mr. Gaston Gelos & Thomas McGregor, 2022. "Exchange-Rate Swings and Foreign Currency Intervention," IMF Working Papers 2022/158, International Monetary Fund.
    7. Lukas Menkhoff, 2010. "High‐Frequency Analysis Of Foreign Exchange Interventions: What Do We Learn?," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 85-112, February.
    8. Melvin, Michael & Menkhoff, Lukas & Schmeling, Maik, 2009. "Exchange rate management in emerging markets: Intervention via an electronic limit order book," Journal of International Economics, Elsevier, vol. 79(1), pages 54-63, September.
    9. Kathryn M. E. Dominguez, 0. "Revisiting Exchange Rate Rules," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 0, pages 1-27.
    10. Engel, Charles, 2014. "Exchange Rates and Interest Parity," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 453-522, Elsevier.
    11. Kathryn M. E. Dominguez, 2020. "Revisiting Exchange Rate Rules," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(3), pages 693-719, September.
    12. Seojin Lee & Young Min Kim, 2020. "Effect of foreign exchange intervention: The case of Korea," Pacific Economic Review, Wiley Blackwell, vol. 25(5), pages 641-659, December.
    13. Lukas Menkhoff, 2013. "Foreign Exchange Intervention in Emerging Markets: A Survey of Empirical Studies," The World Economy, Wiley Blackwell, vol. 36(9), pages 1187-1208, September.
    14. Juan J. Echavarría & Luis F. Melo-Velandia & Mauricio Villamizar-Villegas, 2018. "The impact of pre-announced day-to-day interventions on the Colombian exchange rate," Empirical Economics, Springer, vol. 55(3), pages 1319-1336, November.
    15. Fatum, Rasmus & Pedersen, Jesper, 2009. "Real-time effects of central bank intervention in the euro market," Journal of International Economics, Elsevier, vol. 78(1), pages 11-20, June.
    16. Pasquariello, Paolo, 2007. "Informative trading or just costly noise? An analysis of Central Bank interventions," Journal of Financial Markets, Elsevier, vol. 10(2), pages 107-143, May.
    17. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    18. Marcel Fratzscher & Tobias Heidland & Lukas Menkhoff & Lucio Sarno & Maik Schmeling, 2023. "Foreign Exchange Intervention: A New Database," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(4), pages 852-884, December.
    19. Neely, Christopher J., 2008. "Central bank authorities' beliefs about foreign exchange intervention," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 1-25, February.
    20. Olivier Blanchard & Gustavo Adler & Irineu de Carvalho Filho, 2015. "Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?," NBER Working Papers 21427, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. When Is Foreign Exchange Intervention Effective? Evidence from 33 Countries (AEJ:MA 2019) in ReplicationWiki

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aejmac:v:11:y:2019:i:1:p:132-56. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.