Foreign exchange intervention: how to signal policy objectives and stabilise the economy

Vitale, Paolo

doi:10.1016/s0304-3932(03)00039-4

Cited by 44 publications

(42 citation statements)

References 20 publications

(18 reference statements)

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“…As already mentioned, several authors, such as Bhattacharya and Weller (1997), Montgomery and Popper (2001), and Vitale (1999Vitale ( , 2003, have formulated theoretical models to analyze the signalling role of FX intervention. While developed from a market microstructure perspective, none of these models is fully dynamic, neither it represents faithfully the structure of the spot FX markets.…”

Section: Review Of Related Literaturementioning

confidence: 99%

“…With respect to the latter, it has been claimed that the empirical failure of the traditional models of exchange rate determination lies with the particular forward looking nature of the 1 See Mussa (1981), Bhattacharya and Weller (1997), Montgomery and Popper (2001) and Vitale (1999Vitale ( , 2003.…”

Section: Introductionmentioning

confidence: 99%

“…4 Theoretical underpinnings of this empirical result link the explanatory power of order flow to two different channels of transmission, due respectively to liquidity and information effects. With respect to the former channel, it has simply been suggested that trade innovations perturb the inventories of FX investors which need to be compensated with a shift in expected returns.With respect to the latter, it has been claimed that the empirical failure of the traditional models of exchange rate determination lies with the particular forward looking nature of the 1 See Mussa (1981), Bhattacharya and Weller (1997), Montgomery and Popper (2001) and Vitale (1999Vitale ( , 2003.2 Edison (1993), Sarno and Taylor (2001) We analyze this issue from a market microstructure perspective, formulating a detailed microstructure model of the spot FX markets. This framework allows to study the effects of FX intervention on market conditions and exchange rates via both the signalling and portfoliobalance channels.…”

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confidence: 99%

“…2 Edison (1993), Sarno and Taylor (2001) and Vitale (2007a) contain extensive reviews of this literature.…”

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The impact of FX intervention on FX markets: a market microstructure analysis

Vitale

2010

Int. J. Fin. Econ.

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We formulate a market microstructure model of exchange determination we employ to investigate the impact of foreign exchange (FX) intervention on exchange rates and on FX market conditions. With our formulation we show: i) how FX intervention influences exchange rates via both a portfolio-balance and a signalling channel; and ii) derive a series of testable implications which are coherent with a large body of empirical research. Our investigation also proposes some normative recommendations, as we show: i) that in extreme circumstances large scale FX intervention can have destabilizing effects for the functioning of FX markets; and ii) that the route chosen for the implementation of official intervention has important implications for its impact on exchange rates and on market conditions. JEL Nos.: D82, G14 and G15. Keywords: Foreign Exchange Intervention, Order Flow, Foreign Exchange Micro Structure, Exchange Rate Dynamics.Two important topics of research which have captured the attention of students of exchange rate economics have been the investigation of the effects of FX intervention and the analysis of the microstructure of FX markets.In the 1980s a number of contributions have sighted to understand whether the intervention operations of central banks in FX markets have important effects on currency values, on exchange rate volatility and on market conditions. Indeed, FX intervention may affect the value of currencies and trading activity in FX markets either through a portfolio-balance channel or via a signalling channel. 1 Thus, several empirical investigations, e.g. Dominguez andFrankel (1993a, 1993b), have analyzed the actual effectiveness of FX intervention. 2 These investigations have generally concluded that FX intervention alters exchange rates, even if it is still unclear what central banks can actually achieve and how their intervention operations condition FX markets.The inconclusive nature of this strand of research has been associated with the lack of adequate high frequency data and of a microstructural perspective. 3 Indeed, until the late 1990s no detailed data on FX transactions was available to researchers and it was not possible to conduct any study of the microstructure of FX markets with detailed information on the trading activity of their participants. However, recently the increased competition between trading platforms and data vendors has given researchers and practitioners access to detailed information on transactions between FX traders. This has allowed researchers to investigate the microstructure of FX markets and the impact of trading activity on exchange rate dynamics.The principal result of this new approach to the exchange rate determination is that order flow is an important determinant of exchange rate dynamics in the short-term and possibly even in the medium-term. 4 Theoretical underpinnings of this empirical result link the explanatory power of order flow to two different channels of transmission, due respectively to liquidity and information effects. With r...

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Section: Review Of Related Literaturementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

mentioning

confidence: 99%

“…2 Edison (1993), Sarno and Taylor (2001) and Vitale (2007a) contain extensive reviews of this literature.…”

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confidence: 99%

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The impact of FX intervention on FX markets: a market microstructure analysis

Vitale

2010

Int. J. Fin. Econ.

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“…Jansen and DeHaan (2005) and Sager and Taylor (2004). 6 See Mussa (1981), Dominguez (1992), Vitale (2003), Sarno andTaylor (2001), D'Souza (2002) and Taylor (2005) for further discussion of the intervention-signaling hypothesis. 7 Naranjo and Nimalendran (2000) hypothesize that interventions create significant adverse selection problems for dealers.…”

Section: Intervention News and Exchange Ratesmentioning

confidence: 99%

The Influence of Actual and Unrequited Interventions

Dominguez

Panthaki

2007

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Intervention operations are used by governments to manage their exchange rates but officials rarely confirm their presence in the market, leading inevitably to erroneous reports in the financial press. There are also reports of what we term, unrequited interventions, interventions that the market expects but do not materialize. In this paper we examine the effects of various types of intervention news on intra-day exchange rate behavior. We find that unrequited interventions have a statistically significant influence on returns, volatility and order flow, suggesting that the expectation of intervention, even when governments do not intervene, can affect currency values.

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Official Intervention in the Foreign Exchange Market

Fratzscher

2012

Handbook of Exchange Rates

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Foreign exchange intervention: how to signal policy objectives and stabilise the economy

Cited by 44 publications

References 20 publications

The impact of FX intervention on FX markets: a market microstructure analysis

The impact of FX intervention on FX markets: a market microstructure analysis

The Influence of Actual and Unrequited Interventions

Official Intervention in the Foreign Exchange Market

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