Central Bank Intervention Policy Research Articles

An approximation scheme for impulse control with random reaction periods

We propose an approximation scheme for impulse control models with random reaction periods (ICRRP) and show that the optimal solutions can be found by solving a sequence of optimal stopping problems. Our work enhances viability of the existing ICRRP framework for applications as well as the general literature on stochastic control theory. The efficacy of our approximation scheme is validated by applying it to compute a market-reaction-adjusted optimal central bank intervention policy for a country.

On the existence and uniqueness of the optimal central bank intervention policy in a forex market with jumps

We study a central bank intervention (CBI) problem in the foreign exchange market when the exchange rate follows a jump-diffusion process and show that the optimal CBI policy is a control-band policy. Our main contribution is a rigorous proof of the existence and uniqueness of the optimal CBI policy.

Market-reaction-adjusted optimal central bank intervention policy in a forex market with jumps

Impulse control with random reaction periods (ICRRP) is used to derive a country’s optimal foreign exchange (forex) rate intervention policy when the forex market reacts to the interventions. This paper extends the previous work on ICRRP by incorporating a multi-dimensional jump diffusion process to model the state dynamics, and hence, enhance the viability of the extant model for applications. Furthermore, we employ a novel minimum cost operator that simplifies the computations of the optimal solutions. Finally, we demonstrate the efficacy of our framework by finding a market-reaction-adjusted optimal central bank intervention (CBI) policy for a country. Our numerical results suggests that market reactions and the jumps in the forex market are complements when the reactions increase the forex rate volatility; otherwise, they are substitutes.

On the Existence and Uniqueness of a Central Bank Intervention Policy in a Levy Market

On the Existence and Uniqueness of a Central Bank Intervention Policy in a Levy Market

Off-the-record target zones: theory with an application to Hong Kong’s currency board

This paper provides a modelling framework for evaluating the exchange rate dynamics of a target zone regime with undisclosed bands. We generalize the literature to allow for asymmetric one-sided regimes. Market participants’ beliefs concerning an undisclosed band change as they learn more about central bank intervention policy. We apply the model to Hong Kong’s one-sided currency board mechanism. In autumn 2003, the Hong Kong dollar appreciated from close to 7.80 per US dollar to 7.70, as investors feared that the currency board would be abandoned. In the wake of this appreciation, the monetary authorities finally revamped the regime as a symmetric two-sided system with a narrow exchange rate band.

Off-the-Record Target Zones: Theory with an Application to Hong Kong's Currency Board

This paper provides a modelling framework for evaluating the exchange rate dynamics of a target zone regime with undisclosed bands. We generalize the literature to allow for asymmetric one-sided regimes. Market participants' beliefs concerning an undisclosed band change as they learn more about central bank intervention policy. We apply the model to Hong Kong's one-sided currency board mechanism. In autumn 2003, the Hong Kong dollar appreciated from close to 7.80 per US dollar to 7.70, as investors feared that the currency board would be abandoned. In the wake of this appreciation, the monetary authorities finally revamped the regime as a symmetric two-sided system with a narrow exchange rate band.

Does transparency in central bank intervention policy bring noise to the FX market?: The case of the Bank of Japan

This paper empirically investigates the induced effect of a more and less transparent central bank intervention (CBI) policy on rumors that can emerge. Using the case of Japan, we estimate a dynamic-probit model that explains the main determinants of false reports (i.e. falsely reported interventions) and anticipative rumors (i.e. rumors about future interventions) with reference to the intervention strategy adopted by the central bank for actual and oral interventions, and the uncertainty climate of the market captured by two volatility measures. Our results suggest that the induced effect of a transparent CBI policy on market rumors critically depends on the type of speeches made by officials.

Does Transparency in Central Bank Intervention Policy Bring Noise to the FX Market? The Case of the Bank of Japan

This paper empirically investigates the induced effect of a more and less transparent central bank intervention (CBI) policy on rumors that can emerge. Using the case of Japan, we estimate a dynamic-probit model that explains the main determinants of false reports (i.e. falsely reported interventions)and anticipative rumors (i.e. rumors about future interventions) with reference to the intervention strategy adopted by the central bank for actual and oral interventions, and to the uncertainty climate of the market captured by two volatility measures. Our results suggest that the induced effect of a transparent CBI policy on market rumors critically depends on the type of speeches made by officials.

Asymmetric impact of trade balance news on asset prices

This study documents significant asymmetrical impact of information in trade balance announcements on prices of assets such as equities and foreign exchange rates. Interestingly, foreign exchange rates and equity prices were less responsive to large surprises in the trade balance but more responsive to surprises within one standard deviation of the average. This asymmetry in market reaction to trade balance news seems consistent with the asymmetric nature of central bank intervention policy commitments during the late 1980s. These results documenting the asymmetric impact of news on asset prices may have important implications for asset pricing models and economic policy formulation.

Learning about intervention target zones

This paper provides a framework for evaluating how market participants beliefs about foreign exchange target zones change as they learn about central bank intervention policy. We generalize the standard target-zone model to allow for intra-marginal intervention. Intra-marginal intervention implies that market participants' beliefs about the target zone can be determined from their beliefs about the likelihood of intervention. We then estimate a daily probability of intervention model for the period following the Louvre Accord. We find that the market's views of intervention target zones would have varied quite a bit over time even over this relatively stable period.

Market responses to coordinated central bank intervention

The scale of unilateral and coordinated intervention in the foreign exchange market by the G-5 countries has become considerably larger over the last few years, following a period in which official U.S. policy was opposed to intervention. This paper examines market responses to official sterilized central bank intervention policy over the period 1985 through 1987. The efficacy of sterilized intervention is hypothesized to depend on the market's belief that central banks both have inside information about future monetary policy and the incentive to reveal that information truthfully through intervention signals. Central banks may agree to coordinate their intervention operations in order to influence the market's perception of the relative importance and credibility of own signals. Market responses to intervention over the period 1985 through 1987 are examined econometrically using heretofore unavailable daily data on G-3 unilateral and coordinated intervention operations. The empirical evidence indicates that: (1) even though daily intervention data are not published, market participants were generally able to comtemporaneously observe the source and magnitude of central bank intervention operations, (2) unilateral intervention significantly influenced market expectations in some periods, and (3) coordinated intervention had a significantly different and longer-term influence on market expectations than did unilateral intervention over the three year period examined.