Abstract
This paper presents a new channel of foreign exchange interventions under which official announcements can improve the accuracy of private agents' information and encourage riskarbitrage, thereby enhancing the informativeness of the exchange rate. Unlike the traditional signaling channel, this effect holds even when the central bank does not possess superior information to traders. We also provide evidence that announced interventions are more effective in periods of high implied volatility, consistent with the theoretical prediction that the implied volatility of the exchange rate is positively correlated with the information inaccuracy of traders and the degree of an exchange rate misalignment.
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