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A New Method for Identifying the Effects of Foreign Exchange Interventions

  • Chih-nan Chen

    (Research Analyst, Center for Multicultural Mental Health Research, Harvard University (cchen@chareresearch.org))

  • Tsutomu Watanabe

    (Institute of Economic Research and Research Center for Price Dynamics, Hitotsubashi University (E-mail: tsutomu.w@srv.cc.hit-u.ac.jp))

  • Tomoyoshi Yabu

    (Assistant Graduate School of Systems and Information Engineering, University of Tsukuba, and Institute for Monetary and Economic Studies, Bank of Japan (E-mail: tyabu@sk.tsukuba.ac.jp))

The monetary authorities react even to intraday changes in the exchange rate; however, in most cases, intervention data is available only at a daily frequency. This temporal aggregation makes it difficult to identify the effects of interventions on the exchange rate. We propose a new method based on Markov Chain Monte Carlo simulations to cope with this endogeneity problem: We use "data augmentation" to obtain intraday intervention amounts and then estimate the efficacy of interventions using the augmented data. Applying this method to Japanese data, we find that an intervention of one trillion yen moves the yen/dollar rate by 1.7 percent, which is more than twice as large as the magnitude reported in previous studies applying OLS to daily observations. This shows the quantitative importance of the endogeneity problem due to temporal aggregation.

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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 09-E-06.

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Date of creation: Feb 2009
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Handle: RePEc:ime:imedps:09-e-06
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  1. repec:ner:tilbur:urn:nbn:nl:ui:12-73527 is not listed on IDEAS
  2. repec:cup:cbooks:9780521485845 is not listed on IDEAS
  3. Richard Payne, 2001. "A Transaction Level Study of the Effects of Central Bank Intervention on Exchange Rates," FMG Discussion Papers dp355, Financial Markets Group.
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  5. Rasmus Fatum & Michael Hutchison, 2002. "Effectiveness of official daily foreign exchange market intervention operations in Japan," Pacific Basin Working Paper Series 2003-01, Federal Reserve Bank of San Francisco.
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  8. 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,.
  9. Kathryn Dominguez & Jeffrey A. Frankel, 1990. "Does Foreign Exchange Intervention Work?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 16, March.
  10. Fratzscher, Marcel, 2005. "How successful are exchange rate communication and interventions? Evidence from time-series and event-study approaches," Working Paper Series 0528, European Central Bank.
  11. McCrorie, J.R. & Chambers, M.J., 2004. "Granger Causality and the Sampling of Economic Processes," Discussion Paper 2004-39, Tilburg University, Center for Economic Research.
  12. 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.
  13. Fischer, Andreas M & Zurlinden, Mathias, 1999. "Exchange Rate Effects of Central Bank Interventions: An Analysis of Transaction Prices," Economic Journal, Royal Economic Society, vol. 109(458), pages 662-76, October.
  14. Chow, Gregory C & Lin, An-loh, 1971. "Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 372-75, November.
  15. Eraker, Bjorn, 2001. "MCMC Analysis of Diffusion Models with Application to Finance," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 177-91, April.
  16. Chang, Yuanchen & Taylor, Stephen J., 1998. "Intraday effects of foreign exchange intervention by the Bank of Japan1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 191-210, February.
  17. Rasmus Fatum & Michael M. Hutchison, . "Is Sterilized Foreign Exchange Intervention Effective After All? An Event Study Approach," EPRU Working Paper Series 99-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  18. Kearns, Jonathan & Rigobon, Roberto, 2005. "Identifying the efficacy of central bank interventions: evidence from Australia and Japan," Journal of International Economics, Elsevier, vol. 66(1), pages 31-48, May.
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