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Does foreign exchange intervention signal future monetary policy?

  • Kaminsky, Graciela L.
  • Lewis, Karen K.

A frequently cited explanation for why foreign exchange interventions affect the exchange rate is that these interventions signal future monetary policy intentions. This explanation says that central banks signal a more contractionary monetary policy in the future by buying domestic currency today. Therefore, the expectations of future tighter monetary policy make the domestic currency appreciate, even though the current monetary effects of the intervention are typically offset by central banks. Of course, this explanation presumes that central banks, in fact, back up interventions with subsequent changes in monetary policy. In this paper, the authors empirically examine this presumption.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 37 (1996)
Issue (Month): 2-3 (April)
Pages: 285-312

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Handle: RePEc:eee:moneco:v:37:y:1996:i:2-3:p:285-312
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Martin Eichenbaum & Lawrence J. Christiano, 1992. "Liquidity Effects, Monetary Policy, and the Business Cycle," NBER Working Papers 4129, National Bureau of Economic Research, Inc.
  2. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
  3. Humpage, Owen F. & Osterberg, William P., 1992. "Intervention and the foreign exchange risk premium: An empirical investigation of daily effects," Global Finance Journal, Elsevier, vol. 3(1), pages 23-50.
  4. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
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  7. Steven Strongin, 1992. "The identification of monetary policy disturbances: explaining the liquidity puzzle," Working Paper Series, Macroeconomic Issues 92-27, Federal Reserve Bank of Chicago.
  8. Kathryn Dominguez and Jeffrey A. Frankel., 1990. "Does Foreign Exchange Intervention Matter? Disentangling the Portfolio and Expectations Effects for the Mark," Economics Working Papers 90-133, University of California at Berkeley.
  9. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects and the monetary transmission mechanism," Staff Report 150, Federal Reserve Bank of Minneapolis.
  10. Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 74-104, February.
  11. 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,.
  12. Mishkin, Frederic S, 1982. " Monetary Policy and Short-Term Interest Rates: An Efficient Markets-Rational Expectations Approach," Journal of Finance, American Finance Association, vol. 37(1), pages 63-72, March.
  13. Dominguez, Kathryn Mary, 1990. "Market responses to coordinated central bank intervention," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 32(1), pages 121-163, January.
  14. Graciela L. Kaminsky & Karen K. Lewis, 1993. "Does foreign exchange intervention signal future monetary policy?," Finance and Economics Discussion Series 93-1, Board of Governors of the Federal Reserve System (U.S.).
  15. Michael W. Klein, 1992. "The Accuracy of Reports of Foreign Exchange Intervention," NBER Working Papers 4165, National Bureau of Economic Research, Inc.
  16. Kaminsky, Graciela, 1993. "Is There a Peso Problem? Evidence from the Dollar/Pound Exchange Rate, 1976-1987," American Economic Review, American Economic Association, vol. 83(3), pages 450-72, June.
  17. Melvin, Michael, 1983. "The Vanishing Liquidity Effect of Money on Interest: Analysis and Implications for Policy," Economic Inquiry, Western Economic Association International, vol. 21(2), pages 188-202, April.
  18. Lewis, Karen K, 1995. "Are Foreign Exchange Intervention and Monetary Policy Related, and Does It Really Matter?," The Journal of Business, University of Chicago Press, vol. 68(2), pages 185-214, April.
  19. Loopesko, Bonnie E., 1984. "Relationships among exchange rates, intervention, and interest rates: An empirical investigation," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 257-277, December.
  20. Lewis, Karen K., 1988. "Testing the portfolio balance model: A multi-lateral approach," Journal of International Economics, Elsevier, vol. 24(1-2), pages 109-127, February.
  21. Cochrane, John H, 1989. "The Return of the Liquidity Effect: A Study of the Short-run Relation between Money Growth and Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(1), pages 75-83, January.
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