Abstract
This paper generalizes the reaction functions of central banks' FX interventions to include oral interventions alongside actual ones. Using Japanese data for the 1991-2004 period, we estimate an ordered-probit model explaining the occurrence of each type of intervention and evaluating the extent to which oral and actual interventions are substitutes or complements. In addition, the effectiveness of interventions is examined using an event-study approach. Our results indicate that the Japanese authorities tended to adopt progressively stronger measures as the exchange rate was found to behave in an increasingly unfavorable way. This suggests that words and deeds were only coordinated (i.e. used in a complementary way) in extreme cases. Overall, interventions are found to be moderately successful in correcting unwanted exchange-rate developments, especially volatility.
| Original language | English |
|---|---|
| Pages (from-to) | 367-394 |
| Number of pages | 28 |
| Journal | Journal of the Japanese and International Economies |
| Volume | 23 |
| Issue number | 4 |
| DOIs | |
| Publication status | Published - 1 Dec 2009 |
Funding
Financial support from the Belgian National Fund for Scientific Research (FRFC funding) is gratefully acknowledged. We thank Michel Beine, Hans Dewachter, Marcel Fratzscher, Eric Girardin, David-Jan Jansen, Christelle Lecourt, Kim Oosterlinck, Franz Palm and Ariane Szafarz as well as the participants of the DULBEA’s internal seminar, of the Fifth Econometrics Day at the University of Paris-Nanterre and of the Summer School on “New microstructure of financial markets” held in Aix-en-Provence for their useful comments and suggestions. We are also indebted to Agnès Bénassy-Quéré for providing us with estimates of the fundamental exchange rate and to Jérôme Teiletche for kindly sharing some code with us. Of course, any remaining mistakes are our own responsibility. Appendix A
Keywords
- Central banks
- Communication policy
- Foreign exchange market
- Interventions
