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The Immediate Impact and Persistent Effect of FX Purchases on the Exchange Rate

Author

Listed:
  • Itamar Caspi

    (Bank of Israel)

  • Amit Friedman

    (Bank of Israel)

  • Sigal Ribon

    (Bank of Israel)

Abstract

In recent years, foreign exchange (FX) interventions have been routinely used by the Bank of Israel and other central banks as an additional monetary instrument to moderate appreciation trends of the domestic currency. This paper analyzes the immediate effect of the Bank of Israel’s FX interventions on the exchange rate and its persistence over time. To identify this effect, we first measure the intraday impact of FX intervention using a novel confidential, high-frequency, minute-by-minute data set of interventions between 2009 and 2017. Next, we use our measure to estimate the persistence of FX intervention shocks over longer horizons (in trading days), using local projections. We find that FX intervention shocks cause, on impact, USDILS exchange rate depreciation in over 90 percent of the cases. We also find that this effect has a persistent effect on the USDILS exchange rate for 40–60 trading days.

Suggested Citation

  • Itamar Caspi & Amit Friedman & Sigal Ribon, 2022. "The Immediate Impact and Persistent Effect of FX Purchases on the Exchange Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 18(5), pages 1-31, December.
  • Handle: RePEc:ijc:ijcjou:y:2022:q:5:a:4
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    References listed on IDEAS

    as
    1. Sigal Ribon, 2017. "Why the Bank of Israel Intervenes in the Foreign Exchange Market, and What Happens to the Exchange Rate," Bank of Israel Working Papers 2017.04, Bank of Israel.
    2. Òscar Jordà & Alan M. Taylor, 2016. "The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy," Economic Journal, Royal Economic Society, vol. 126(590), pages 219-255, February.
    3. Olivier Blanchard & Gustavo Adler & Irineu de Carvalho Filho, 2015. "Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?," NBER Working Papers 21427, National Bureau of Economic Research, Inc.
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    5. Mark Gertler & Peter Karadi, 2015. "Monetary Policy Surprises, Credit Costs, and Economic Activity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 44-76, January.
    6. Kuersteiner, Guido M. & Phillips, David C. & Villamizar-Villegas, Mauricio, 2018. "Effective sterilized foreign exchange intervention? Evidence from a rule-based policy," Journal of International Economics, Elsevier, vol. 113(C), pages 118-138.
    7. Michael D. Bauer & Glenn D. Rudebusch, 2014. "The Signaling Channel for Federal Reserve Bond Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 233-289, September.
    8. Adler, Gustavo & Lisack, Noëmie & Mano, Rui C., 2019. "Unveiling the effects of foreign exchange intervention: A panel approach," Emerging Markets Review, Elsevier, vol. 40(C), pages 1-1.
    9. Mauricio Villamizar-Villegas & David Perez-Reyna, 2017. "A Theoretical Approach To Sterilized Foreign Exchange Intervention," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 343-365, February.
    10. Perez-Reyna, David & Villamizar-Villegas, Mauricio, 2019. "Exchange rate effects of financial regulations," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 228-245.
    11. Òscar Jordà, 2005. "Estimation and Inference of Impulse Responses by Local Projections," American Economic Review, American Economic Association, vol. 95(1), pages 161-182, March.
    12. Zvi Eckstein & Amit Friedman, 2011. "The equilibrium real exchange rate for Israel," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 201-213, Bank for International Settlements.
    13. Gustavo Adler & Mr. Camilo E Tovar Mora, 2011. "Foreign Exchange Intervention: A Shield Against Appreciation Winds?," IMF Working Papers 2011/165, International Monetary Fund.
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    Cited by:

    1. Yossi Yakhin, 2024. "Foreign Exchange Interventions in the New-Keynesian Model: Transmission, Policy, and Welfare," Bank of Israel Working Papers 2024.01, Bank of Israel.

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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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