Foreign exchange market intervention in two small open economies: the Canadian and Australian experience
This paper provides and empirical assessment of the effectiveness of foreign exchange intervention in two small open economies. Specifically, we examine the intervention practices of the Bank of Canada (BoC) and the Reserve Bank of Australia (RBA) for a sample of daily data spanning the period from 1989 to the end of 1997. Our analysis suggests that both central bank intervene in foreign exchange markets in response to excessive exchange rate volatility and uncertainty. Volatility is measured using the implied volatility of foreign currency futures options and uncertainty is proxied using the kurtosis of the implied risk-neutral probability density functions. The latter are derived using the implied volatility of options on foreign currency futures. We also examine whether the introduction of inflation targets affected the success of interventions. in the foreign exchange market. Unlike other studies in this area we also explicitly consider the role of commodity futures prices which turn out to be important in understanding the effectiveness of intervention. We find that central bank intervention in the foreign exchange amrket was largely unsuccessful in both countries though volatility and kurtosis were modestly affected.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Robert A. Amano & Tony S. Wirjanto, "undated".
"A Further Analysis of Exchange Rate Targeting in Canada,"
Staff Working Papers
94-2, Bank of Canada.
- Robert A. Amano & Tony S. Wirjanto, 1994. "A Further Analysis of Exchange Rate Targeting in Canada," Econometrics 9406001, EconWPA, revised 22 Jun 1994.
- Baillie, Richard T. & Osterberg, William P., 1997. "Why do central banks intervene?," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 909-919, December.
- Haan, Wouter J. den & Spear, Scott A., 1998. "Volatility clustering in real interest rates Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 431-453, May.
- 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.
- Catherine Bonser-Neal, 1996. "Does central bank intervention stabilize foreign exchange rates?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 43-57.
- Llad Phillips & John Pippenger, 1993. "Stabilization of the Canadian Dollar: 1975-1986," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 416-446, May.
- Weymark, Diana N, 1997. "Measuring the degree of exchange market intervention in a small open economy," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 55-79, February.
- Almekinders, G.J. & Eijffinger, S.C.W., 1996.
"A friction model of daily Bundesbank and Federal Reserve intervention,"
Other publications TiSEM
9ca974cc-1549-4752-8dbe-0, Tilburg University, School of Economics and Management.
- Almekinders, Geert J. & Eijffinger, Sylvester C. W., 1996. "A friction model of daily Bundesbank and Federal Reserve intervention," Journal of Banking & Finance, Elsevier, vol. 20(8), pages 1365-1380, September.
- Neil, Beattie & Fillion, Jean-François, 1999. "An Intraday Analysis of the Effectiveness of Foreign Exchange Intervention," Staff Working Papers 99-4, Bank of Canada.
- Almekinders, Geert J & Eijffinger, Sylvester C W, 1994.
"Daily Bundesbank and Federal Reserve Interventions: Are They a Reaction to Changes in the Level and Volatility of the DM/$-Rate?,"
Springer, vol. 19(1), pages 111-130.
- Almekinders, G.J. & Eijffinger, S.C.W., 1994. "Daily Bundesbank and federal reserve interventions : Are they a reaction to changes in the level and volatility of the DM/$-rate?," Other publications TiSEM e583abfb-39f0-4c9d-8848-5, Tilburg University, School of Economics and Management.
- Sarno, Lucio & Taylor, Mark P, 2001.
"Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?,"
CEPR Discussion Papers
2690, C.E.P.R. Discussion Papers.
- 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.
- John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, Enero.
- Kim, Suk-Joong & Kortian, Tro & Sheen, Jeffrey, 2000. "Central bank intervention and exchange rate volatility -- Australian evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 381-405, December.
- Murray, J. & Van Norden, S. & Vigfusson, R., 1996. "Excess Volatility and Speculative Bubbles in the Canadian Dollar: Real of Imagined?," Technical Reports 76, Bank of Canada.
- Frank Campbell & Eleanor Lewis, 1998. "What Moves Yields in Australia?," RBA Research Discussion Papers rdp9808, Reserve Bank of Australia.
- Murray, John, 1999. "Why Canada Needs a Flexible Exchange Rate," Staff Working Papers 99-12, Bank of Canada.
- Pierre L. Siklos, 1999. "Inflation-target design: changing inflation performance and persistence in industrial countries," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 46-58.
- Agathe Cote, "undated". "Exchange Rate Volatility and Trade: A Survey," Staff Working Papers 94-5, Bank of Canada.
- Weymark, Diana N., 1995. "Estimating exchange market pressure and the degree of exchange market intervention for Canada," Journal of International Economics, Elsevier, vol. 39(3-4), pages 273-295, November.
- Siklos, Pierre L, 2000. "Is the MCI a Useful Signal of Monetary Policy Conditions? An Empirical Investigation," International Finance, Wiley Blackwell, vol. 3(3), pages 413-437, November.
- Michael P. Leahy & Charles P. Thomas, 1996. "The sovereignty option: the Quebec referendum and market views on the Canadian dollar," International Finance Discussion Papers 555, Board of Governors of the Federal Reserve System (U.S.).
- Kim, Suk-Joong & Sheen, Jeffrey, 2002. "The determinants of foreign exchange intervention by central banks: evidence from Australia," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 619-649, October.
When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:22:y:2003:i:3:p:393-416. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.