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Foreign exchange intervention when interest rates are zero: Does the portfolio balance channel matter after all?

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  • Fatum, Rasmus

Abstract

This paper provides an empirical investigation of transmission channels of central bank foreign exchange intervention when interest rates are zero and traditional monetary policy options are constrained. The paper develops empirically testable hypotheses regarding the functioning of the intervention transmission channels under study. These hypotheses evolve around whether or not the market is aware or unaware of intervention. Official daily data on interventions in the JPY/USD market during the 1999 to 2004 Japanese zero-interest rate period facilitate the analysis. The results of the analysis are consistent with the suggestion that intervention when interest rates are zero works through the portfolio-balance channel.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:jimfin:v:57:y:2015:i:c:p:185-199
    DOI: 10.1016/j.jimonfin.2015.07.015
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    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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    Cited by:

    1. Rasmus Fatum & Jesper Pedersen & Peter Norman Sørensen, 2010. "Are the Intraday Effects of Central Bank Intervention on Exchange Rate Spreads Asymmetric and State Dependent?," Discussion Papers 10-20, University of Copenhagen. Department of Economics.
    2. repec:kap:openec:v:30:y:2019:i:2:d:10.1007_s11079-019-09528-8 is not listed on IDEAS
    3. repec:aea:aejmac:v:11:y:2019:i:1:p:132-56 is not listed on IDEAS
    4. Engel, Charles, 2014. "Exchange Rates and Interest Parity," Handbook of International Economics, Elsevier.
    5. 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.
    6. repec:eee:jimfin:v:75:y:2017:i:c:p:32-46 is not listed on IDEAS
    7. Gerlach-Kristen, Petra & McCauley, Robert N. & Ueda, Kazuo, 2016. "Currency intervention and the global portfolio balance effect: Japanese lessons," Journal of the Japanese and International Economies, Elsevier, vol. 39(C), pages 1-16.
    8. Jeffrey Frankel, 2019. "Systematic Managed Floating," Open Economies Review, Springer, vol. 30(2), pages 255-295, April.
    9. Capraro Rodríguez Santiago & Perrotini Hernández Ignacio, 2012. "Intervenciones cambiarias esterilizadas, teoría y evidencia:el caso de México," Contaduría y Administración, Accounting and Management, vol. 57(2), pages 11-44, abril-jun.

    More about this item

    Keywords

    Zero interest rates; Foreign exchange market intervention; Channels of transmission;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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