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When do central banks prefer to intervene secretly?

  • Ferré Carracedo, Montserrat
  • Manzano, Carolina

Central banks often intervene secretly in the foreign exchange market. This secrecy seems to be at odds with the signalling channel. In this article we will analyse when a central bank intervening in the foreign exchange rate market purely through the signalling channel would prefer to act secretly or publicly. By using a microstructure model, we will show that the consistency of the intervention with fundamentals, the volume of noise trading, the weight given to the effectiveness of intervention and the degree of superior information held by the central bank will influence the decision to intervene secretly or publicly. Keywords: foreign exchange intervention, market microstructure. JEL Classifi…cation: D82, E58, F31, G14.

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Paper provided by Universitat Rovira i Virgili, Department of Economics in its series Working Papers with number 2072/5317.

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Date of creation: 2007
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Handle: RePEc:urv:wpaper:2072/5317
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  1. Peiers, Bettina, 1997. " Informed Traders, Intervention, and Price Leadership: A Deeper View of the Microstructure of the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 52(4), pages 1589-1614, September.
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  8. Beine, Michel & Bernal, Oscar & Gnabo, Jean-Yves & Lecourt, Christelle, 2009. "Intervention policy of the BoJ: A unified approach," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 904-913, May.
  9. Dominguez, Kathryn M. E., 2003. "The market microstructure of central bank intervention," Journal of International Economics, Elsevier, vol. 59(1), pages 25-45, January.
  10. Michel Beine & Oscar Bernal Diaz, 2005. "Why do Central Banks intervene secretly? preliminary evidence of the BoJ," DULBEA Working Papers in, ULB -- Universite Libre de Bruxelles.
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  21. Manzano, Carolina, 2002. "The Effect of the Transparency of Order Flows in a Dealer Market with Several Securities," Journal of Financial Intermediation, Elsevier, vol. 11(2), pages 212-227, April.
  22. Priscilla Chiu, 2003. "Transparency versus constructive ambiguity in foreign exchange intervention," BIS Working Papers 144, Bank for International Settlements.
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