IDEAS home Printed from https://ideas.repec.org/p/boi/wpaper/2017.04.html
   My bibliography  Save this paper

Why the Bank of Israel Intervenes in the Foreign Exchange Market, and What Happens to the Exchange Rate

Author

Listed:
  • Sigal Ribon

    () (Bank of Israel)

Abstract

The Bank of Israel renewed its intervention in the foreign exchange market in early 2008 after about a decade of not intervening. This study examines the effect of the Bank’s purchases on the shekel exchange rate. The two-stage estimation approach provides the opportunity to understand the factors influencing the timing and scope of the intervention. The results of the estimation show that the Bank of Israel’s purchases contributed to a depreciation of the shekel. The average monthly volume of purchases for periods in which the Bank of Israel actually intervened in the market, approximately $830 million, contributed to a depreciation in the nominal effective exchange rate that was larger by about 0.6 percent, compared with a month with no intervention. The level of foreign exchange reserves (relative to GDP) and the deviation of the real exchange rate from its long-term equilibrium level tend to increase the volume of purchases by the central bank. Support for "leaning against the wind" behavior by the central bank was also found. The results suggest that the "signaling channel" is important in explaining the effect of intervention on the exchange rate.

Suggested Citation

  • 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.
  • Handle: RePEc:boi:wpaper:2017.04
    as

    Download full text from publisher

    File URL: ftp://repec-boi.northeurope.cloudapp.azure.com/RePEc/boi/wpaper/WP_2017.04.pdf
    File Function: First version, 2017
    Download Restriction: no

    References listed on IDEAS

    as
    1. Nuttathum Chutasripanich & James Yetman, 2015. "Foreign exchange intervention: strategies and effectiveness," BIS Working Papers 499, Bank for International Settlements.
    2. 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.
    3. Kaminsky, Graciela L. & Lewis, Karen K., 1996. "Does foreign exchange intervention signal future monetary policy?," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 285-312, April.
    4. 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.
    5. Roman Horvath, 2007. "Modelling Central Bank Intervention Activity under Inflation Targeting," Economics Bulletin, AccessEcon, vol. 6(29), pages 1-8.
    6. 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.
    7. 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.
    8. Mauricio Villamizar-Villegas & David Perez-Reyna, 2015. "A Survey on the Effects of Sterilized Foreign Exchange Intervention," Borradores de Economia 862, Banco de la Republica de Colombia.
    9. 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.
    10. Lukas Menkhoff, 2013. "Foreign Exchange Intervention in Emerging Markets: A Survey of Empirical Studies," The World Economy, Wiley Blackwell, vol. 36(9), pages 1187-1208, September.
    11. Madhusudan Mohanty, 2013. "Market volatility and foreign exchange intervention in EMEs: what has changed?," BIS Papers chapters,in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 73, pages 01-10 Bank for International Settlements.
    12. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-529, October.
    13. Juan David Durán-Vanegas, 2015. "Do foreign exchange interventions work as coordinating signals in Colombia?," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República - ESPE, vol. 33(78), pages 169-175, December.
    14. Gustavo Adler & Camilo E Tovar Mora, 2011. "Foreign Exchange Intervention; A Shield Against Appreciation Winds?," IMF Working Papers 11/165, International Monetary Fund.
    15. Ito, Takatoshi & Yabu, Tomoyoshi, 2007. "What prompts Japan to intervene in the Forex market? A new approach to a reaction function," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 193-212, March.
    16. Herman Kamil, 2008. "Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia," IMF Working Papers 08/88, International Monetary Fund.
    17. Karnit Flug & Amir Shpitzer, 2013. "Rethinking exchange rate policy in a small open economy: the Israeli experience during the great recession," BIS Papers chapters,in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 73, pages 189-204 Bank for International Settlements.
    18. Gustavo Adler & Noemie Lisack & Rui Mano, 2015. "Unveiling the Effects of Foreign Exchange Intervention; A Panel Approach," IMF Working Papers 15/130, International Monetary Fund.
    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.
    as


    Cited by:

    1. repec:kap:openec:v:30:y:2019:i:2:d:10.1007_s11079-019-09522-0 is not listed on IDEAS
    2. Alex Cukierman, 2019. "Forex Intervention and Reserve Management in Switzerland and Israel since the Financial Crisis: Comparison and Policy Lessons," Open Economies Review, Springer, vol. 30(2), pages 403-424, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boi:wpaper:2017.04. 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: (Dafna Koby). General contact details of provider: http://edirc.repec.org/data/boigvil.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.