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Daily Effects of Foreign Exchange Intervention: Evidence from Official Bank of Canada Data

  • Rasmus Fatum

    (School of Business, University of Alberta)

This paper analyzes the effects of official, daily Bank of Canada intervention in the CAD/USD exchange rate market over the January 1995 to September 1998 period. Using an event study methodology and different criteria for effectiveness, movements in the CAD/USD exchange rate over the 1 through 10 days surrounding intervention events are investigated. It is shown that Bank of Canada intervention was systematically associated with both a change in the direction and a smoothing of the CAD/USD exchange rate. Bank of Canada intervention did not, however, succeed in reducing the volatility of the CAD/USD exchange rate. Additionally, the paper introduces the issue of currency co-movements to the intervention literature. It is shown that the effects of intervention are weakened when adjusting for general currency co-movements against the USD, suggesting that currency co-movements should be taken into account when addressing the effects of central bank intervention aimed at managing a minor currency vis-à-vis a major currency.

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File URL: http://www.econ.ku.dk/epru/files/wp/wp-05-07.pdf
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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 05-07.

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Length: 20 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:kud:epruwp:05-07
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  1. BEINE, Michel & LAURENT, Sébastien & LECOURT, Christelle, . "Official central bank interventions and exchange rate volatility: Evidence from a regime-switching analysis," CORE Discussion Papers RP -1705, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Christopher J. Neely, 2000. "The practice of central bank intervention: looking under the hood," Working Papers 2000-028, Federal Reserve Bank of St. Louis.
  3. Priscilla Chiu, 2003. "Transparency versus constructive ambiguity in foreign exchange intervention," BIS Working Papers 144, Bank for International Settlements.
  4. Beine, Michel, 2004. "Conditional covariances and direct central bank interventions in the foreign exchange markets," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1385-1411, June.
  5. Hong Liang & Paul Cashin & Hali J. Edison, 2003. "Foreign Exchange Intervention and the Australian Dollar; Has it Mattered?," IMF Working Papers 03/99, International Monetary Fund.
  6. Jeff M. Rogers & Pierre Siklos, 2001. "Foreign Exchange Market Intervention in Two Small Open Economies: The Canadian and Australian Experience," Research Paper Series 57, Quantitative Finance Research Centre, University of Technology, Sydney.
  7. Dominguez, Kathryn M.E., 2006. "When do central bank interventions influence intra-daily and longer-term exchange rate movements?," Journal of International Money and Finance, Elsevier, vol. 25(7), pages 1051-1071, November.
  8. 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.
  9. Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 685-718.
  10. 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.
  11. Chris D'Souza, 2002. "A Market Microstructure Analysis of Foreign Exchange Intervention in Canada," Working Papers 02-16, Bank of Canada.
  12. Owen F. Humpage, 2003. "Government intervention in the foreign exchange market," Working Paper 0315, Federal Reserve Bank of Cleveland.
  13. Fatum, Rasmus, 2000. "On the effectiveness of sterilized foreign exchange intervention," Working Paper Series 0010, European Central Bank.
  14. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
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