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

Author

Listed:
  • Rasmus Fatum

    (University of Alberta)

  • Michael M. Hutchison

    (University of California, Santa Cruz, Hong Kong Institute for Monetary Research)

Abstract

Estimating the effect of official foreign exchange market intervention is complicated by the fact that intervention at any point entails a self-selection choice made by the authorities and that no counterfactual is observed. To address these issues, we estimate the counterfactual exchange rate movement in the absence of intervention by introducing the method of propensity score matching to estimate the average treatment effect (ATE) of intervention. To derive the propensity scores we introduce a new intervention reaction function that includes the difference between market expectations and official announcements of macroeconomic developments that can influence the decision to intervene. We estimate the ATE for daily official intervention in Japan 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 and ineffective (or possibly counterproductive) during 2003 and 2004. These results hold up to a variety of robustness tests. Only sporadic and relatively infrequent intervention appears to be effective.

Suggested Citation

  • Rasmus Fatum & Michael M. Hutchison, 2008. "Evaluating Foreign Exchange Market Intervention: Self-selection, Counterfactuals and Average Treatment Effects," Working Papers 022008, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:022008
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    References listed on IDEAS

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    More about this item

    Keywords

    Foreign Exchange Intervention; Bank of Japan; Self-Selection; Matching Methods;
    All these keywords.

    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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