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How successful is the G7 in managing exchange rates?

  • Marcel Fratzscher

The paper assesses the extent to which the Group of Seven (G7) has been successful in its management of major currencies since the 1970s. Using an event-study approach, the paper finds evidence that the G7 has been overall effective in moving the U.S. dollar, yen and euro in the intended direction at horizons of up to three months after G7 meetings, but not at longer horizons. While the success of the G7 is partly dependent on the market environment, it is also to a significant degree endogenous to the policy process itself. The findings indicate that the reputation and credibility of the G7, as well as its ability to form and communicate a consensus among individual G7 members, are important determinants for the G7's ability to manage major currencies. The paper concludes by analyzing the factors that help the G7 build reputation and consensus, and by discussing the implications for global economic governance.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 24.

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Date of creation: 2009
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Handle: RePEc:fip:feddgw:24
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  1. Charles Engel & Nelson C. Mark & Kenneth D. West, 2007. "Exchange Rate Models Are Not as Bad as You Think," NBER Working Papers 13318, National Bureau of Economic Research, Inc.
  2. Fratzscher, Marcel, 2009. "How successful is the G7 in managing exchange rates?," Journal of International Economics, Elsevier, vol. 79(1), pages 78-88, September.
  3. Andrew K. Rose, 2002. "Do We Really Know that the WTO Increases Trade?," NBER Working Papers 9273, National Bureau of Economic Research, Inc.
  4. Marcel Fratzscher & Arnaud Mehl, 2009. "Do China and oil exporters influence major currency configurations?," Globalization and Monetary Policy Institute Working Paper 25, Federal Reserve Bank of Dallas.
  5. Robert J. Barro & Jong-Wha Lee, 2002. "IMF Programs: Who is Chosen and What Are the Effects?," NBER Working Papers 8951, National Bureau of Economic Research, Inc.
  6. Christopher J. Neely, 1998. "Technical analysis and the profitability of U.S. foreign exchange intervention," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 3-17.
  7. Richard Clarida & Daniel Waldman, 2007. "Is Bad News About Inflation Good News for the Exchange Rate?," NBER Working Papers 13010, National Bureau of Economic Research, Inc.
  8. Humpage, Owen F, 1999. "U.S. Intervention: Assessing the Probability of Success," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 731-47, November.
  9. Jansen, David-Jan & De Haan, Jakob, 2005. "Talking heads: the effects of ECB statements on the euro-dollar exchange rate," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 343-361, March.
  10. Vitale, Paolo, 1999. "Sterilised central bank intervention in the foreign exchange market," Journal of International Economics, Elsevier, vol. 49(2), pages 245-267, December.
  11. Takatoshi Ito, 2003. "Is foreign exchange intervention effective? The Japanese experiences in the 1990s," Chapters, in: Monetary History, Exchange Rates and Financial Markets, chapter 5 Edward Elgar.
  12. Paul C. Tetlock & Maytal Saar-Tsechansky & Sofus Macskassy, 2008. "More Than Words: Quantifying Language to Measure Firms' Fundamentals," Journal of Finance, American Finance Association, vol. 63(3), pages 1437-1467, 06.
  13. Rasmus Fatum & Michael M. Hutchison, 2003. "Is sterilised foreign exchange intervention effective after all? an event study approach," Economic Journal, Royal Economic Society, vol. 113(487), pages 390-411, 04.
  14. Yin-Wong Cheung & Menzie D. Chinn & Antonio Garcia-Pascual, 2005. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," Working Papers 122005, Hong Kong Institute for Monetary Research.
  15. Jonathan Kearns & Roberto Rigobon, 2003. "Identifying the Efficacy of Central Bank Interventions: Evidence from Australia," RBA Research Discussion Papers rdp2003-04, Reserve Bank of Australia.
  16. Paul C. Tetlock, 2007. "Giving Content to Investor Sentiment: The Role of Media in the Stock Market," Journal of Finance, American Finance Association, vol. 62(3), pages 1139-1168, 06.
  17. Fratzscher, Marcel, 2006. "On the long-term effectiveness of exchange rate communication and interventions," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 146-167, February.
  18. 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.
  19. Momtchil Pojarliev & Richard M. Levich, 2007. "Do Professional Currency Managers Beat the Benchmark?," NBER Working Papers 13714, National Bureau of Economic Research, Inc.
  20. Von Furstenberg, George M. & Daniels, Joseph P., 1991. "Policy undertakings by the seven "summit" countries: ascertaining the degree of compliance," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 35(1), pages 267-307, January.
  21. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-69, December.
  22. Blinder, Alan S. & Ehrmann, Michael & de Haan, Jakob & Fratzscher, Marcel & Jansen, David-Jan, 2008. "Central Bank communication and monetary policy: a survey of theory and evidence," Working Paper Series 0898, European Central Bank.
  23. Klein, Michael & Mizrach, Bruce & Murphy, Robert G, 1991. "Managing the Dollar: Has the Plaza Agreement Mattered?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(4), pages 742-51, November.
  24. Mark P. Taylor, 2004. "Is Official Exchange Rate Intervention Effective?," Economica, London School of Economics and Political Science, vol. 71, pages 1-11, 02.
  25. Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Working Papers 2005-030, Federal Reserve Bank of St. Louis.
  26. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
  27. Beine, Michel & Janssen, Gust & Lecourt, Christelle, 2009. "Should central bankers talk to the foreign exchange markets?," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 776-803, September.
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