Abstract
This paper provides a framework to analyze the effect of a central bank's bond market intervention on foreign exchange rates. Using this framework, we quantify the impact of the Federal Reserve's 2008–2011 quantitative easing (QE) program on the USD/JPY exchange rate. We find that the Fed's QE accounts for a significant portion of the dollar's depreciation during this period. A central monetary authority can affect exchange rates in two ways, either directly by intervening in foreign exchange markets or indirectly by affecting interest rates. Our analysis emphasizes the importance of the indirect channel when a central bank undertakes large scale asset purchases.
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