Effects Of Foreign Exchange Intervention Research Articles

International effects of quantitative easing and foreign exchange intervention

A two-country general equilibrium model is developed to study the global consequences of quantitative easing and foreign exchange intervention. The model incorporates financial frictions such as limited commitment, differential pledgeability of assets as collateral, and a low supply of collateralizable assets. Due to differential asset pledgeability, financial intermediaries acquire different asset portfolios particular to their home country. Quantitative easing can reduce long-term nominal interest rates, mitigate financial frictions globally, and depreciate the currency of the country that supplies more pledgeable assets. The international effects of foreign exchange intervention depend on the implementing country. If implemented by the country that supplies more pledgeable assets, such intervention can ease financial frictions and enhance welfare globally.

The effectiveness of foreign exchange interventions in Japan

This study informs the academic and policy debate on the policy effectiveness of exchange rate interventions on exchange rate levels and volatility. Using a constructed data set comprising daily data on exchange rates, monetary policy fundamentals, exchange rate intervention dates and magnitudes of those interventions as well as financial news speculation of such interventions, we empirically estimate the policy effectiveness of Bank of Japan interventions in the exchange rate over the 12-year period between 2010 and 2022. This allows us to investigate the policy effectiveness of a variety of exchange rate interventions, or news of exchange rate interventions, across different time-horizons. We find that policy interventions in the yen exchange rate are more effective over short-horizons than long-horizons, more effective when the policy objective is a competitive devaluation of the yen rather than a revaluation, and more effective at influencing the level of the yen against major world currencies other than the US dollar. In fact, for the yen-dollar rate, we find that policy interventions may have the unintended consequences of weakening the yen (when the policy intention is to strengthen it) and increasing volatility in the yen-dollar exchange rate.

Foreign exchange intervention and the Dutch disease under incomplete information

This study examined the effectiveness of foreign exchange intervention as a policy response to the Dutch disease episode in an oil-exporting developing economy when the monetary authority is uncertain about the persistence of oil price shocks. Based on the results of the different scenarios modelled, the policy response to the Dutch disease will have to go beyond foreign exchange intervention to embrace structural reforms that will address the self-replicating causes of the continuous decline in manufacturing output. There is, however, still room to explore the optimal foreign exchange intervention (FXI) policy in response to the Dutch disease at least in the short run. The optimal FXI policy when the monetary authority has incomplete information on the persistence of an oil price shock; that is, whether it is a temporary or a permanent shock, would be a sustained accumulation of reserves (preferably beyond 5 quarters) to lean against appreciation pressures on the real exchange rate and prevent the decline of manufacturing output. Also, the results show that conventional monetary policy outperforms central bank intervention over the entire period adopted (from 1983Q1 to 2020Q4) but was outperformed by foreign exchange intervention when a sub-sample analysis was performed (for 1998Q1 to 2020Q4). This reflects the impact of the practice of Central Banks in developing economies that began accumulating reserves actively in the early 2000s. There is, however, a need for better coordination between both policy instruments in dealing with the Dutch disease episode.

Effectiveness of foreign exchange interventions: evidence from New Zealand

ABSTRACT This paper examines the effectiveness of explicit and implicit foreign exchange (FX) interventions in New Zealand: one secret spot market intervention and two implicit interventions – a regular Monetary Policy Statement (MPS) and an unexpected oral intervention by the Reserve Bank of New Zealand (RBNZ) governor addressing the New Zealand Dollar (NZD). By applying a synthetic control methodology to a unique dataset of RBNZ interventions, we construct a counterfactual to estimate their effect. The results indicate that the actual intervention and the MPS release were ineffective in moving the NZD. However, the speech depreciated the NZD by 1.12%, although the effect was small and short lived. Our findings suggest that FX interventions, explicit or implicit, are a weak policy tool to affect the exchange rate in New Zealand.

Bank Balance Sheets and External Shocks in Asia

In emerging Asia, banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy. By contrast, with real shocks, the exchange rate serves as a shock absorber, and any FXI that weakens that function can be costly. We also explore the effectiveness of the monetary policy interest rate, macroprudential policies (MPMs) and capital flow management measures (CFMs).

Bank Balance Sheets and External Shocks in Asia: The Role of Fxi, Mpms and Cfms

In emerging Asia, banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy. By contrast, with real shocks, the exchange rate serves as a shock absorber, and any FXI that weakens that function can be costly. We also explore the effectiveness of the monetary policy interest rate, macroprudential policies (MPMs) and capital flow management measures (CFMs).

The effectiveness of FX interventions: A meta-analysis

There is ample empirical literature centering on the effectiveness of foreign exchange intervention (FXI). Given the mix of objectives and country-heterogeneity, the general lack of consensus thus far is no surprise. We shed light on this debate by conducting the first comprehensive meta-analysis in the FXI literature, with 279 reported effects that stem from 74 distinct empirical studies. We cover estimations conducted in 19 countries across five decades. Overall, our meta-survey reports an average depreciation of domestic currency of 1% and a reduction of exchange rate volatility of 0.6%, in response to a $1 billion US dollar purchase. Results are qualitatively confirmed but smaller in size under fixed and random-effect estimations. When narrowing in on different economic factors, we find that effects are magnified for cases consistent with the monetary trilemma (greater if financial openness and monetary independence are low). Effects are also larger in emerging than advanced economies, when banking crises remain mild, and when interventions are large in size and are announced.

The Effectiveness of FX Interventions: A Meta-Analysis

There is ample empirical literature centering on the effectiveness of foreign exchange intervention (FXI). Given the mix of objectives and country-heterogeneity, the general lack of consensus thus far is no surprise. We shed light on this debate by conducting the first comprehensive meta-analysis in the FXI literature, with 279 reported effects that stem from 74 distinct empirical studies. We cover estimations conducted in 19 countries across five decades. Overall, our meta-survey reports an average depreciation of domestic currency of 1% and a reduction of exchange rate volatility of 0.6%, in response to a $1 billion US dollar purchase. Results are qualitatively confirmed but smaller in size under fixed and random-effect estimations. When narrowing in on different economic factors, we find that effects are magnified for cases consistent with the monetary trilemma (greater if financial openness and monetary independence are low). Effects are also larger in emerging than advanced economies, when banking crises remain mild, and when interventions are large in size and are announced.

Is Foreign Exchange Intervention a Panacea in Diversified Circumstances? The Perspectives of Asymmetric Effects

Owing to the country’s heavy reliance on exports, the role of foreign exchange intervention in South Korea’s economic development is self-evident. The effectiveness of the intervention is what we are concerned with in this paper. Recently, a growing body of literature has engaged in exploring the asymmetric effects of foreign exchange intervention both theoretically and empirically. Against this background, we employ a threshold vector autoregression (TVAR) model in parallel with its generalized impulse response functions (GIRFs) to show that there are asymmetric effects of the Bank of Korea (BOK)-led interventions regardless of the volatility regimes.

Effect of foreign exchange intervention: The case of Korea

AbstractUsing a rolling‐window approach that allows time‐varying coefficients, we estimate the vector autoregressive model with the Markov chain Monte Carlo method to analyse the effectiveness of foreign exchange interventions in Korea. Our results show that a negative shock in international reserves (buying domestic currency or selling foreign currency) results in a significant appreciation of the domestic currency, a reduction in implied volatility and an increase in capital inflows. We also find that Korean exchange rate policies focus on the stabilization of the foreign exchange market rather than the depreciation of the Korean won. These patterns appear more obvious after the 2008 global financial crisis. This suggests that time variation should be taken into account to better understand the effects of foreign exchange interventions.

Foreign Exchange Intervention and Exchange Rate Volatility: Evidence from Turkey

This paper investigates the effects of foreign exchange intervention by the Central Bank of the Republic of Turkey on the behavior of exchange rates during the float period starting with 2001 crisis. Even though the bank is apparently quite willing to intervene the foreign exchange market during the float period, the results suggest that intervention policies are completely ineffective. More specifically, the purchases operations do not have any statistically significant impact on the exchange rate returns and volatility while the central bank intervention sales exert an incorrectly signed effect on the levels of exchange rates and tend to raise volatility of exchange rates returns. Hence, the bank should avoid intervening foreign currency markets. Additionally, the tightening monetary policy in the form of rising the short run interest rates is effective for positive exchange rates returns; but not for dampening the volatility.

Unveiling the effects of foreign exchange intervention: A panel approach

The paper studies the effect of foreign exchange intervention on the level of the exchange rate relying on an instrumental-variable panel approach suited to assess the macroeconomic importance of such effect (i.e., beyond short-term effects found in the literature). We find robust evidence that intervention affects the exchange rate in a meaningful way from a macroeconomic perspective. A purchase of foreign currency of 1 percentage point of GDP causes a depreciation of the nominal and real exchange rates in the ranges of [1.7–2.0] percent and [1.4–1.7] percent, respectively. The effects are found to be persistent and symmetric for FX purchases and sales.

The effectiveness of foreign exchange intervention in India : Evidence from time-series approach

Central bank has a vital responsibility in stabling the exchange rate and dampening the market uncertainties for sustainable economic growth. This study inspects the aspect of RBI’s foreign exchange market intervention operation and its impact on the exchange rate level and volatility through time series methodology. GARCH (1,1) model with weekly data from April 2002 to June 2018 is used to explore the issue. The study discovered evidence for ‘leaning against the wind’ policy and provide evidence for curbing the market uncertainty. Similarly, it asserts that RBI’s action to inject foreign currency influenced the exchange rate but accelerated market uncertainty. Contrary to that RBI’s action to absorb excess supply by intervention curbed market uncertainty but failed to prevent appreciation pressure. Significance of good news points out its ability to appreciate rupee and curb the market uncertainty. The results strongly support the necessity of intervention and capital control for ensuring the sustainable growth of the foreign exchange market without uncertainty.

The Relative Effectiveness of Spot and Derivatives‐Based Intervention

AbstractThis paper studies the relative effectiveness of foreign exchange intervention in spot and derivatives markets. We use Brazilian data where spot and nondeliverable futures intervention have been used in tandem for more than a decade. The analysis finds evidence of a link between both modes of intervention and the exchange rate. In line with theory, the impact of spot intervention is strikingly similar to that of futures intervention when convertibility risk is limited. We show that both types of interventions also affect the level and the price of hedging risk in the foreign exchange market.

When Is Foreign Exchange Intervention Effective? Evidence from 33 Countries

This paper examines foreign exchange intervention based on novel daily data covering 33 countries from 1995 to 2011. We find that intervention is widely used and an effective policy tool, with a success rate in excess of 80 percent under some criteria. The policy works well in terms of smoothing the path of exchange rates, and in stabilizing the exchange rate in countries with narrow band regimes. Moving the level of the exchange rate in flexible regimes requires that some conditions are met, including the use of large volumes and that intervention is made public and supported via communication. (JEL E52, E58, F31, F33, O19, O24)

An empirical test for the effectiveness of central bank interventions in foreign exchange markets: An application to the Canadian and Swiss Central Banks

Abstract. This paper investigates the effectiveness of foreign exchange intervention of central banks of Canada and Switzerland. We examine the effectiveness of Canada and Switzerland interventions policies on Canadian dollar against US dollar and Swiss franc against US dollar exchange rates volatility over the 1980-2014 period. A behavioral exchange rate equation is estimated with instrumental variables methodology. The main results indicate that interventions generally reduce exchange rates volatility. However, the Swiss National Bank seems to be more efficient by stabilizing the Swiss franc than the Bank of Canada, whose interventions, despite its effectiveness, remains weak. Keywords. Volatility, Exchange rate, Official international reserves. JEL. E51, E52, E58.

The effectiveness of foreign exchange intervention in Latin America: A nonlinear approach to the coordination channel

This paper examines the effectiveness of the coordination channel of foreign exchange intervention in Brazil, Chile, Colombia, Mexico, and Peru. The theoretical approach is based on a model in which traders' confidence in the fundamentals depends on exchange rate misalignments and central bank intervention. The presence of the monetary authority in the foreign exchange market may increase traders' confidence and speed up the mean reversion of the exchange rates. The empirical section of this paper is based on a Smooth Transition Regression GARCH-M model. The results suggest that foreign exchange intervention via the coordination channel has been effective over the period 2000–2013.

Self-selection and treatment effects: Revisiting the effectiveness of foreign exchange intervention

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 specifically examine the effectiveness of official daily interventions by Japanese monetary authorities in the JPY/USD market over the period from 1 January 1999 to 31 December 2011. To achieve our aim, we extended in a continuous treatment setting the inverse probability weights estimator developed by Jorda and Taylor (2015) and Angrist, Jorda and Kuersteiner (forthcoming) et al. (2018) to control for self-selection bias. In accordance with existing evidence, 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 for the full-sample period and across two of the three sub-samples. We also find evidence that once the exchange rate moves in the desired direction, the effect is not long-lasting, but, slightly longer, contrary to existing evidence.

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

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.

The Relative Effectiveness of Spot and Derivatives Based Intervention

This paper studies the relative effectiveness of foreign exchange intervention in spot and derivatives markets. We make use of Brazilian data where spot and non-deliverable futures based intervention have been used in tandem for more than a decade. The analysis finds evidence in favor of a significant link between both modes of intervention and the Real/Dollar exchange rate return. In line with theory, the impact of spot market intervention is strikingly similar to that achieved through futures based intervention worth an equivalent amount in notional principal when convertibility risk is limited. We show that both types of interventions also affect the level and the price of hedging risk in the foreign exchange market.