Exchange Intervention Research Articles

The Information Improving Channel of Exchange Rate Intervention: How Do Official Announcements Work?

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.

Persistent Appreciations and Overshooting: A Normative Analysis

Most economies experience episodes of persistent real exchange rate appreciations, when the question arises whether there is a need for intervention to protect the export sector. This paper presents a model of irreversible destruction where exchange rate intervention may be justified if the export sector is financially constrained. However, the criterion for intervention is not whether there are bankruptcies or not, but whether these can cause a large exchange rate overshooting once the factors behind the appreciation subside. The optimal policy includes ex-ante and ex-post interventions. Ex-ante (that is, during the appreciation phase) interventions have limited effects if the financial resources in the export sector are relatively abundant. In this case the bulk of the intervention takes place ex-post, and is concentrated in the first period of the depreciation phase. In contrast, if the financial constraint in the export sector is tight, the policy is shifted toward ex-ante intervention and it is optimal to lean against the appreciation.

The impact of monetary policy on the exchange rate: A high frequency exchange rate puzzle in emerging economies

This study investigates the impact of monetary policy shocks on the exchange rates of Brazil, Mexico and Chile. We find that even a focus on 1 day exchange rate changes following policy events – which reduces the potential for reverse causality considerably – fails to lend support for the view that associates unexpected interest rate hikes with immediate appreciations. This lack of empirical backing for the predictions of standard open economy models persists irrespective of whether we use the US Dollar or effective exchange rates, whether changes in the policy rate that were followed by exchange rate interventions are excluded, whether “contaminated” events are dropped from the analysis or whether we allow for non-linearities. We argue that it is difficult to attribute this stronger version of the exchange rate puzzle to fiscal dominance, as unexpected rate increases are not associated with increases in risk premia, and similar results are obtained in the case of Chile – a country that has had the highest possible short-term credit rating since 1995 and a debt/GDP ratio below 10%.

Understanding Differences in Growth Performance in Latin America and Developing Countries between the Asian and Global Financial Crises

Latin American performance during the global financial crisis was unprecedented. Many developing and emerging countries successfully weathered the worst crisis since the Great Depression. Was it good luck? Was it good policies? In this paper we compare growth during the Asian and global financial crises and find that a looser monetary policy played an important role in mitigating crisis. We also find that higher private credit, more financial openness, less trade openness, and greater exchange rate intervention worsened economic performance. Our analysis of Latin American countries confirms that effective macroeconomic management was key to good economic performance. Finally, we present evidence from a sample of 31 emerging markets that high terms of trade had a positive impact on resilience.

Exchange Rate and Central Bank Intervention

Exchange rate and central bank intervention is an important topic in the exchange rate determination [1-4]. Exchange rates are volatile after the breakdown of the Bretton Woods system of fixed exchange rate in the year 1973. Central banks especially those in economies adopted a managed exchange rate regime actively intervene in the exchange rate market to maintain their exchange rates and to reduce their exchange rate volatility, which can affect international trade, financial flow and economic growth. Central bank intervention in the exchange rate market may want to accrue international reserves to enhance the fundamental of the economy [5]. There are two important issues related to the exchange rate intervention, namely the effectiveness of central bank intervention and the success of central bank in maintaining the exchange rate and in reducing exchange rate volatility [1,4,6]. In general, the literature of exchange rate and central bank intervention is inconclusive on the impact of central bank intervention. Most studies conclude that central bank intervention tends to increase exchange rate volatility.

The Impact of Monetary Policy on the Exchange Rate: A High Frequency Exchange Rate Puzzle in Emerging Economies

This study investigates the impact effect of monetary policy shocks on the exchange rates of Brazil, Mexico and Chile. We find that even a focus on 1 day exchange rate changes following policy events -- which reduces the potential for reverse causality considerably -- fails to lend support for the conventional view that associates unexpected interest rate hikes with appreciations. This lack of empirical backing for the predictions of standard open economy models persists irrespective of whether we use the US Dollar or effective exchange rates, whether interest rate changes are anticipated or not, whether changes in the policy rate that were followed by exchange rate intervention are excluded or whether "contaminated" events are dropped from the analysis. We argue that it is difficult to attribute this stronger version of the exchange rate puzzle to fiscal dominance, as unexpected rate increases are not associated with increases in risk premia, and similar results are obtained in the case of Chile -- a country that has had the highest possible short-term credit rating since 1997 and a debt/GDP ratio below 10%. The weakness of the interest -- exchange rate link has important implications for optimal monetary policy in emerging economies.

Interventions and Inflation Expectations in an Inflation Targeting Economy

In this paper we explore the role that exchange rate interventions may play in determining inflation expectations in Chile. To that end, we consider a set of nine deciles of inflation expectations coming from the survey of professional forecasters carried out by the Central Bank of Chile. We consider two episodes of preannounced central bank interventions during the sample period 2007-2012.

The Signalling Channel of Central Bank Interventions: Modelling the Yen/US Dollar Exchange Rate

This paper presents a theoretical framework analysing the signalling channel of exchange rate interventions as an informational trigger. We develop an implicit target zone framework with learning in order to model the signalling channel. The theoretical premise of the model is that interventions convey signals that communicate information about the exchange rate objectives of the central bank. The model is used to analyse the impact of Japanese FX interventions during the period 1999–2011 on the yen/US dollar dynamics.

Did You Have an Impact? A Theory-Based Method for Planning and Evaluating Knowledge-Transfer and Exchange Activities in Occupational Health and Safety

Few evaluation tools are available to assess knowledge-transfer and exchange interventions. The objective of this paper is to develop and demonstrate a theory-based knowledge-transfer and exchange method of evaluation(KEME) that synthesizes 3 theoretical frameworks: the promoting action on research implementation of health services (PARiHS) model, the transtheoretical model of change, and a model of knowledge use. It proposes a new term, keme, to mean a unit of evidence-based transferable knowledge. The usefulness of the evaluation method is demonstrated with 4 occupational health and safety knowledge transfer and exchange (KTE) implementation case studies that are based upon the analysis of over 50 pre-existing interviews. The usefulness of the evaluation model has enabled us to better understand stakeholder feedback, frame our interpretation, and perform a more comprehensive evaluation of the knowledge use outcomes of our KTE efforts.

A NOTE ON FOREIGN EXCHANGE INTERVENTIONS AT ZERO INTEREST RATES

This note uses a nonlinear structural vector autoregression model to empirically investigate the effectiveness of official foreign exchange (FX) interventions in an economy when interest rates are constrained to the zero level, based on Japanese data in the 1990s. The model allows us to estimate the effects of FX interventions operating through different channels. We find that FX interventions are still capable of influencing the foreign exchange rate in a zero-interest-rate environment, even though their effects are greatly reduced by the zero lower bound on interest rates. Our results suggest that although it might be feasible to use the exchange rate as an alternative monetary policy instrument at zero interest rates as proposed by McCallum (Inflation Targeting and the Liquidity Trap, NBER working paper 8225, 2000), the exchange rate–based Taylor rule may not be very effective in achieving the ultimate policy goals.

Exchange rate intervention in small open economies: The role of risk premium and commodity price shocks

We study the effect of country risk premium and commodity price shocks on monetary policy in small open economies. Risk premium shocks not only can explain most of the variance in the exchange rate, but also can expand GDP. Our estimations indicate that the impact of a real depreciation on exports far exceeds not only the balance sheet effect, but also the effect of an increase in the cost of imported inputs. However, in a more complex environment, where the changes in exports are offset by negative shocks to commodity prices, the contraction stemming from the balance sheet effect reappears.

Management of exchange rate regimes in emerging Asia

This paper revisits the issue of exchange rate regimes in emerging Asia over the decade 1999–2009. It finds that while Asia is home to a wide array of exchange rate regimes, there are signs of gradual movement toward somewhat greater exchange rate flexibility in many of the regional countries. There appears to be evidence of an apparent “fear of appreciation” which is manifested in asymmetric exchange rate intervention—i.e., a willingness to allow depreciations but reluctance to allow appreciations. This policy of effective exchange rate undervaluation is rather unorthodox from a neoclassical sense, but is consistent with a development policy centered on suppressing the price of non-tradable goods relative to tradables (i.e., real exchange rate undervaluation).

Central Bank Exchange Rate Interventions and Market Expectations: The Case of Mexico during the Financial Crisis 2008-2009

The objective of this research paper is to analyze if exchange rate interventions that the Central Bank of Mexico had during the 2008-2009 financial crisis influenced the Mexican Peso-US Dollar exchange rate market expectations. Expectations are gauged by Risk-Neutral Densities (RNDs) extracted from option prices. The method used to estimate RNDs is the Volatility Function Technique proposed by Malz (1997). The results show that interventions caused changes in expectations around the date of the intervention. There is a common pattern of statistical significant decreases in exchange rate implied mean and variance immediately after the period of intervention. The higher implied moments decrease as well. There is also found a causality effect that runs in both directions, that is, between exchange rate expectations and Central Bank interventions.

Asymmetric Exchange Rates and Unofficial Exchange Rate Interventions: The Case of South Korea

Applying Milton Friedman's ‘plucking’ model of output fluctuations, we investigate the behavior of the Korean won/dollar exchange rate using a state-space model with Markov switching, which incorporates both symmetric and asymmetric shocks. We find that the Korean won/US dollar exchange rate rarely falls below its trend, but is plucked upward from time to time by transitory shocks. This asymmetry suggests that the monetary authority unofficially intervenes in the foreign exchange market to support its own target level from below. Further evidence from changes in reserve assets indirectly supports our finding.

Central Bank Exchange Rate Interventions and Market Expectations: The Case of México During the Financial Crisis 2008-2009

The objectiveof this paperis to examine if the exchange-rateinterventionsof theCentral Bank of Mexico during the 2008-2009 financial crisis had an eect on the (Mexican Peso-US Dollar) exchange rate market expectations. Expectations are generated by Risk-Neutral Densities (RNDs) extracted from option prices; the used method to estimate RNDs is the volatility function technique proposed by Malz (1997). The obtained results show that interventions caused changes in expectations around the date of the intervention. There is a pattern of a statistically significant decreasing of the mean and variance in the implied exchange rate immediately after the period of intervention. The higher implied moments decrease as well. Finally, it was also found a causalityeect that runs in both directions;between exchange-rate expectations and Central Bank interventions. Resumen

The Signaling Channel of Central Bank Interventions: Modelling the Yen/US Dollar Exchange Rate

This paper presents a theoretical framework analyzing the signalling channel of exchange rate interventions as an informational trigger. We develop an implicit target zone framework with learning in order to model the signalling channel. The theoretical premise of the model is that interventions convey signals that communicate information about the exchange rate objectives of central bank. The model is used to analyze the impact of Japanese FX interventions during the period 1999-2011 on the yen/US dollar dynamics.

The Effects of Bank Reforms on the Monetary Transmission Mechanism in Emerging Market Economies: Evidence from Egypt

Abstract: This paper investigates the transmission of monetary policy to the real economy after the adoption of bank reforms in emerging market economies (EMEs). The Egyptian case is empirically studied to test the efficacy of the banking sector as a transmission agent subsequent to the banking reforms that extended from 1991 to 2009. The structural vector autoregressive methodology is employed to investigate the impact of the interest rate and foreign exchange rate channels on output and inflation. The results of the study reveal several interactions among the two types of channels. Second, interest rate intervention proves to have substantial effects on output, but less on inflation. Third, exchange rate intervention has some effects on inflation, but less on output. Thus, both transmission channels have showed superior effectiveness after the banking reform. This indicates that the Central Bank of Egypt should not continue to depend on the interest rate channel alone, but has to additionally utilize the exchange rate channel in order to successfully achieve inflation targeting that has been its prime goal since 2003 and even more after the global food crisis of 2007/8. This ruling could prove functional when conducting monetary policy in EMEs of similar circumstances to Egypt.

Teaching Critical Thinking to Nurses in a Ugandan Hospital

A partnership that was established to provide cross-cultural learning for senior-level community health nursing students from the United States also provided a learning opportunity for nurses at a pediatric neurosurgical hospital in Uganda. The faculty who accompanied the students on the study abroad to the CURE Children’s Hospital of Uganda provided an educational session on critical thinking in response to request from the hospital administrators. Learning outcomes were evidenced through informal one-on-one interactions following the sessions. Even a small contribution such as this teaching intervention in cross-cultural exchange may affirm the belief that “each drop counts” as the nurses may obtain skills that enhance their ability to contribute to saving the lives of their patients.

Is Exchange Rate Stabilization a+L4510n Appropriate Cure for the Dutch Disease?

This paper evaluates how successful is a policy of exchange rate stabilization to counteract the negative effects of a Dutch Disease episode. We consider a small open economy model that incorporates nominal rigidities and a learning-by-doing externality in the tradable sector. The paper shows that leaning against an appreciated exchange rate can prevent an inefficient loss of tradable output but at the cost of generating a misallocation of resources in other sectors of the economy. The paper also finds that welfare is a decreasing function of exchange rate intervention. These results suggest that stabilizing the nominal exchange rate in response to a Dutch Disease episode is highly distortionary.

Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease?

This paper evaluates how successful is a policy of exchange rate stabilization to counteract the negative effects of a Dutch Disease episode. We consider a small open economy model that incorporates nominal rigidities and a learning-by-doing externality in the tradable sector. The paper shows that leaning against an appreciated exchange rate can prevent an inefficient loss of tradable output but at the cost of generating a misallocation of resources in other sectors of the economy. The paper also finds that welfare is a decreasing function of exchange rate intervention. These results suggest that stabilizing the nominal exchange rate in response to a Dutch Disease episode is highly distortionary.