Self-Selection and Treatment Effects in Macroeconomics: Revisiting the Effectiveness of Foreign Exchange Intervention

Abstract

Along the lines of the treatment effects literature, this paper empirically revisits the issue of the so-called “intervention effect”, i.e., the effectiveness of official foreign exchange intervention on the movement of the exchange rate. We extended in a continuous treatment setting the inverse probability weights estimator developed by Jorda and Taylor (2015) and Angrist, Jorda and Kuersteiner (forthcoming) to control for self-selection bias. We then illustrate the application of this technique by examining the effectiveness of official daily interventions by Japanese monetary authorities in the JPY/USD market. In accordance with existing evidence using this intervention data, this paper finds that periods of intervention characterized by large, infrequent and sporadic interventions are effective in moving the changes in the exchange rate in the desired direction. We also find evidence that the intervention effect does not last longer than two days after the intervention takes place.