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Does foreign exchange intervention signal future monetary policy?

  • Graciela L. Kaminsky
  • Karen K. Lewis

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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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 93-1.

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Date of creation: 1993
Date of revision:
Handle: RePEc:fip:fedgfe:93-1
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  1. 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.
  2. Kathryn M. Dominguez & Jeffrey Frankel, 1990. "Does Foreign Exchange Intervention Matter? Disentangling the Portfolio and Expectations Effects for the Mark," NBER Working Papers 3299, National Bureau of Economic Research, Inc.
  3. Graciela Kaminsky & Karen K. Lewis, 1993. "Does Foreign Exchange Intervention Signal Future Monetary Policy?," NBER Working Papers 4298, National Bureau of Economic Research, Inc.
  4. 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,.
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  9. Owen F. Humpage & William P. Osterberg, 1990. "Intervention and the foreign exchange risk premium: an empirical investigation of daily effects," Working Paper 9009, Federal Reserve Bank of Cleveland.
  10. 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.
  11. 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.
  12. Klein, Michael W., 1993. "The accuracy of reports of foreign exchange intervention," Journal of International Money and Finance, Elsevier, vol. 12(6), pages 644-653, December.
  13. 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.
  14. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 82(2), pages 346-53, May.
  15. 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.
  16. 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.
  17. 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.
  18. Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 74-104, February.
  19. Reichenstein, William, 1987. "The Impact of Money on Short-term Interest Rates," Economic Inquiry, Western Economic Association International, vol. 25(1), pages 67-82, January.
  20. Mishkin, Frederie S., 1981. "Monetary policy and long-term interest rates : An efficient markets approach," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 29-55.
  21. 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.
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