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The Effectiveness of Fed Intervention on the USD/DM Foreign Exchange Market

Author

Listed:
  • Huang Zhaodan

    () (Utica College)

  • Neun Stephen

    () (Utica College)

Abstract

This study empirically examines the effectiveness of Fed intervention on the USD/DM exchange market using an event study approach. The event window is defined as 4 (8) days prior/post an intervention. Based on the empirical analysis, the results show that when the Fed follows an "against the wind" policy, exchange rate movements are smoothed and may switch direction. The results are robust and hold for different event window definitions and sample ranges. To test whether the results are due to the exchange rate movement itself, we conduct a simple test using customer trades by the Fed. The results do not exhibit a systematic pattern. We also find that a joint intervention has a stronger impact on the exchange rate level when the Fed buys US dollars. The policy implication of our findings is that intervention in foreign exchange markets on the part of the Fed to impact the value of the US dollar is a viable policy option.

Suggested Citation

  • Huang Zhaodan & Neun Stephen, 2006. "The Effectiveness of Fed Intervention on the USD/DM Foreign Exchange Market," Global Economy Journal, De Gruyter, vol. 6(2), pages 1-19, May.
  • Handle: RePEc:bpj:glecon:v:6:y:2006:i:2:n:3
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    Cited by:

    1. Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 685-718.
    2. Francisco Ledesma-Rodriguez & Manuel Navarro-Ibanez & Jorge Perez-Rodriguez & Simon Sosvilla-Rivero, 2011. "Implicit bands in the yen/dollar exchange rate," Applied Economics, Taylor & Francis Journals, vol. 43(10), pages 1241-1255.

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