Talks, Financial Operations Or Both? Generalizing Central Banks' FX Reaction Functions

This paper generalizes central banks' FX interventions reaction functions to include oral interventions alongside actual ones. Using Japanese data for the 1991-2004 period, we estimate an ordered probit explaining the occurrence of each type of intervention and evaluating the extent to which oral and actual interventions are substitutes or complements. Besides that, the effectiveness of interventions is examined using an event-study approach. Our results indicate that Japanese authorities tended to adopt progressively stronger measures as the exchange rate behaved in an increasingly unfavorable way. This suggests that words and acts were used as complements only in extreme cases. Overall, interventions are found to be somewhat successful in correcting unwanted exchange rate developments and especially volatility.