Intervention policy of the BoJ: A unified approach

Abstract

Intervening in the FX market implies a complex decision process for central banks. Monetary authorities have to decide whether to intervene or not, and if so, when and how. Since the successive steps of this procedure are likely to be highly interdependent, we adopt a nested logit approach to capture their relationships and to characterize the prominent features of the various steps of the intervention decision. Our findings shed some light on the determinants of central bank interventions, on the so-called secrecy puzzle and on the identification of the variables influencing the detection of foreign exchange transactions by market traders. Financial support from the Belgian National Fund for Scientific Research (FRFC Program) is gratefully acknowledged. We would like to thank Cinzia Cirillo for computational assistance as well as Agnès Bénassy-Quéré for providing us with estimates of the fundamental exchange rate value. We are also grateful to Gabriele Galati for sharing his dataset that allows to make some cross-checks with our findings. We thank participants of seminars and conference held in Luxembourg, Paris Nanterres and at the Bank of Canada for comments and suggestions, and in particular G. Galati, C. De Souza and R. Miller. The usual disclaimer applies.

Foreign exchange market interventions and the $–¥ exchange rate in the long run

“…In addition, the second period is characterized by coordinated interventions, as described in Section 2.3. This is consistent with the literature, which states that coordinated interventions made known to the public are more likely to succeed (Beine et al, 2009;Fratzscher, 2009b).…”

Determination of China’s foreign exchange intervention: evidence from the Yuan/Dollar market

“…In a further study, Ito and Yabu (2007) find that in addition to the influences of day t-1 deviation and the previous 21 days' deviation, the past five-year moving average of deviations is also a triggering factor. However, Herrera and Ozbay (2005) and Beine et al (2009) do not find this factor to be significant. Brandner and Grech (2005) study the influence of conditional volatility of exchange rates on intervention decisions for participant members of Europe's Exchange Rate Mechanism I (ERM I).…”

“…Frenkel et al (2004) find that volatility can affect the intervention decision. However, estimating a multinomial logit model and a nested logit model, Beine et al (2009) find that the Japanese central bank does not take volatility into consideration when making decisions on intervention. Galati et al (2007) and Ito (2007) also obtain evidence that volatility is not a determinant of intervention.…”

“…To analyse the CB intervention, we first try to detect the time and time intensity of the Chinese operation. Following Beine et al (2009), we search the global news reports that indicate possible PBOC intervention as evidenced in the statements of market traders and analysts. We scrutinize the newswire reports in Factiva and Reuters China that mention the PBOC, adopting two basic rules: First, when it is reported that direct central bank intervention has occurred, we mark this day as a CB intervention day.…”

Interdependencies between Monetary policy and Foreign-Exchange Intervention under Inflation Targeting

“…The empirical literature focuses on the estimation of "intervention reaction functions" to predict the timing and magnitude of interventions, as well as for testing whether or not the motives stated by the authorities for intervening are borne out by the data (Almekinders, 1995;Almekinders and Eijffinger, 1996;Baillie and Osterberg, 1997;Ito and Yabu, 2007;Kearns and Rigobon, 2005;Bernal, 2006;Beine et al, 2007). Annex 1 provides an overview of the empirical literature.…”