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Evaluating Foreign Exchange Market Intervention: Self-Selection, Counterfactuals and Average Treatment Effects

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Listed author(s):
  • Fatum, Rasmus
  • Hutchison, Michael M.

Abstract

Studies of central bank intervention are complicated by the fact that we typically observe intervention only during periods of turbulent exchange markets. Furthermore, entering the market during these particular periods is a conscious “self-selection†choice made by the intervening central bank. We estimate the “counterfactual†exchange rate movements that allow us to determine what would have occurred in the absence of intervention and we introduce the method of propensity score matching to the intervention literature in order to estimate the “average treatment effect†(ATE) of intervention. Specifically, we estimate the ATE for daily Bank of Japan intervention over the January 1999 to March 2004 period. This sample encompasses a remarkable variation in intervention frequencies as well as unprecedented frequent intervention towards the latter part of the period. We find that the effects of intervention vary dramatically and inversely with the frequency of intervention: Intervention is effective over the 1999 to 2002 period, ineffective during 2003 and counterproductive during the first quarter of 2004.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt02c028gr.

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Date of creation: 30 May 2006
Handle: RePEc:cdl:ucscec:qt02c028gr
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Keywords: Foreign Exchange Intervention; Bank of Japan; Self-Selection; Matching Methods;

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Find related papers by JEL classification:
  • 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
  • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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  28. Ho, W.-M.Wai-Ming, 2004. "The liquidity effects of foreign exchange intervention," Journal of International Economics, Elsevier, vol. 63(1), pages 179-208, May.
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Cited by:

  1. Jaromir Benes & Andrew Berg & Rafael Portillo & David Vavra, 2015. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," Open Economies Review, Springer, vol. 26(1), pages 81-108, February.
  2. Shinji Takagi & Hiroki Okada, 2013. "Central Bank Independence and the Signaling Effect of Intervention: A Preliminary Exploration," Discussion Papers in Economics and Business 13-04, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  3. Hall, Stephen G. & Kenjegaliev, Amangeldi & Swamy, P.A.V.B. & Tavlas, George S., 2013. "Measuring currency pressures: The cases of the Japanese yen, the Chinese yuan, and the UK pound," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 1-20.
  4. Juan José Echavarría & Luis Fernando Melo Velandia & Mauricio Villamizar, 2013. "The Impact of Different Types of Foreign Exchange Intervention: An Event Study Approach," Borradores de Economia 784, Banco de la Republica de Colombia.
  5. Mariko Hatase & Mototsugu Shintani & Tomoyoshi Yabu, 2013. "Great earthquakes, exchange rate volatility and government interventions," Vanderbilt University Department of Economics Working Papers 13-00007, Vanderbilt University Department of Economics.
  6. Radhika Pandey & Gurnain Pasricha & Ila Patnaik & Ajay Shah, 2015. "Motivations for Capital Controls and Their Effectiveness," Staff Working Papers 15-5, Bank of Canada.
  7. Edgar Ventura Neyra & Gabriel Rodríguez, 2015. "Explaining the Determinants of the Frequency of Exchange Rate Interventions in Peru Using Count Models," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 61(3), pages 261-292.
  8. Catalán-Herrera, Juan, 2016. "Foreign exchange market interventions under inflation targeting: The case of Guatemala," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 42(C), pages 101-114.
  9. João Barata R. B. Barroso, 2014. "Realized Volatility as an Instrument to Official Intervention," Working Papers Series 363, Central Bank of Brazil, Research Department.
  10. 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.
  11. repec:eee:jimfin:v:75:y:2017:i:c:p:32-46 is not listed on IDEAS
  12. Fatum, Rasmus & Yamamoto, Yohei, 2014. "Large versus small foreign exchange interventions," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 114-123.
  13. Taro Esaka & Shinji Takagi, 2012. "Testing the Effectiveness of Market-Based Controls: Evidence from the Experience of Japan with Short-Term Capital Flows in the 1970s," Discussion Papers in Economics and Business 12-03, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).

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