When is Foreign Exchange Intervention Effective? Evidence from 33 Countries

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This study examines foreign exchange intervention based on novel daily data covering 33 countries from 1995 to 2011. We find that intervention is widely used and an effective policy tool, with a success rate in excess of 80 percent under some criteria. The policy works well in terms of smoothing the path of exchange rates, and in stabilizing the exchange rate in countries with narrow band regimes. Moving the level of the exchange rate in flexible regimes requires that some conditions are met, including the use of large volumes and that intervention is made public and supported via communication. Terms of use: Documents in

The relationship between M3 and consumer price index in the Czech Republic

“…Most of these, however, focus only on how currency intervention influences exchange rate (e.g., Vitale, 2011;Reitz & Taylor, 2012). Fratzscher et al (2015) investigated the currency intervention of 33 central banks (including the CNB) from 1995 to 2011. The authors came to the conclusion that currency intervention is a very effective monetary policy tool (although in the sense of its influence on exchange rate).…”

The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone

“…Furthermore, the results show how financial market information can be used by central banks to assess the costs associated with the implementation of unilateral exchange rate policies. Before concluding this section, it is nevertheless worth emphasizing that the size of the SNB's FX interventions in the period of interest is extraordinarily large: According to FRATZSCHER et al (2015) (and ignoring the fact that the available information on central bank FX interventions only covers sterilized interventions, which is a reasonable approximation in a near-zero interest rate environment, given the evidence from Japan in the 1990s, where the distinction between both intervention approaches became obsolete (SPIEGEL, 2003) (FROOT and OBSTFELD, 1991), it may be hypothesized that some of the underlying assumption may be violated in the period of interest. For instance, it may be argued that the assumption of a stable domestic money demand function or the validity of the purchasing power parity is questionable in periods of financial turmoil.…”

“…Other explanations may be that the Swiss target zone vis-à-vis the euro currency was not perfectly credible (HERTRICH and ZIMMERMANN (2015) and JERMANN (2015)). Indeed, FRATZSCHER et al (2015) document that FX interventions are more effective, if these transactions are executed in line with prior FX rate trends, which may partially explain the extraordinary size of the SNB's euro purchases in the period of interest. Alternatively, assuming that the Swiss currency was indeed fairly priced and not overvalued prior to the announcement of the floor, the difference between the average EUR-CHF FX rate in the period of interest of 1.22 minus the average EUR-CHF FX rate in the month prior to the introduction of the floor (i. e., from August 08, 2011 to September 5, 2011) of 1.13 implies a depreciation of 8.13 %.…”

“…24 USD-CHF 0.9258 * USD 122.1m * 43.5 % * 260 * 10/3 ≈ CHF 42.6bn. 1 percentage point of GDP causes a depreciation of the nominal exchange rate in the range of [1.7-2.0] percent, it implies that the SNB would have had to purchase EUR currency in the range of [4.07-4.79] percent of the Swiss GDP, which is much larger than the average size of interventions in terms of GDP in the range of [0.02-0.05] percent documented in FRATZSCHER et al (2015). Hence, a total transaction volume in the range of CHF 25.7bn-CHF 30.3bn might have caused a depreciation of around 8.13 % in the period of interest.…”

Do Exchange Rate Shocks Have Asymmetric Effects on Reserve Accumulation? Evidence from Emerging Markets*

“…In the same way, Fratzscher et al . () use novel daily data covering 33 countries from 1995 to 2011 to examine the determinants of effective foreign intervention, and they find that exchange rate intervention is effective, and frequently used in emerging and developing economies. They also show that intervention size and the communication strategy of central banks are key factors in strengthening effectiveness, and that most interventions are leaning against the wind.…”