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Foreign-exchange intervention strategies and market expectations: insights from Japan

  • Gnabo, Jean-Yves
  • Teiletche, Jérôme

This study extends the traditional set of central bank's interventions to include official announcements in order to provide empirical evidence on two pivotal questions: (i) are FX authorities able to influence market expectations with different instruments? (ii) how should interventions be designed to have the greatest impact? Using Japanese data over 1992-2004 and an event-study approach, we estimate the effect of different strategies on the USD/JPY exchange-rate risk-neutral density. Overall, transparent policies (public and oral interventions) appear to be the most effective. Moreover, the effect is greater when policies involve a financial cost (risk) suggesting that simple announcements can only be deemed as an imperfect substitute for actual interventions.

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Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 19 (2009)
Issue (Month): 3 (July)
Pages: 432-446

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Handle: RePEc:eee:intfin:v:19:y:2009:i:3:p:432-446
Contact details of provider: Web page: http://www.elsevier.com/locate/intfin

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