Friction model and foreign exchange market intervention

The friction model is consistent with the hypothesis that a central bank intervenes in a foreign exchange market only if the necessity grows beyond certain thresholds. For this feature, the model is adopted in some recent studies as an attractive central bank reaction function. However, with official data on Federal Reserve and Bundesbank intervention, this paper shows that the friction model's advantage relative to a linear model may be negligible in terms of RMSE and MAE of in-sample fitting and out-of-sample forecasts. The implication is that intervention decisions are at the monetary authorities' discretion rather than dictated by a rule.     

The coordination channel of foreign exchange intervention: A nonlinear microstructural analysis

Taylor (1994, 1995) [Taylor, M.P., 1994. Exchange rate behaviour under alternative exchange rate regimes. In: Kenen, P. (Ed.), Understanding Interdependence: The Macroeconomics of the Open Economy. Princeton University Press, Princeton; Taylor, M.P., 1995. The economics of exchange rates. Journal of Economic Literature 33, 13-47] has proposed the coordination channel as a means by which foreign exchange market intervention may be effective, in addition to the traditional portfolio balance and signalling channels. If strong and persistent misalignments of the exchange rate are caused by nonfundamental influences, such that a return to equilibrium is hampered by a coordination failure among fundamentals-based traders, then official intervention may act as a coordinating signal, encouraging stabilising speculators to re-enter the market at the same time. We develop this idea in the framework of a simple microstructural model of exchange rate movements, which we then estimate using daily data on the dollar-mark exchange rate and on Federal Reserve and Bundesbank intervention operations. The results are supportive of the existence of a coordination channel of intervention effectiveness.     

Central bank intervention and foreign exchange volatility

This paper provides additional empirical evidence on the topic of the effectiveness and the impact of Federal Reserve intervention on U.S. exchange rates. Using a daily measure of exchange rate intervention in the yen/dollar and mark/dollar exchange markets for the period January 3, 1985 to March 19, 1997, this paper finds a statistically significant impact of intervention on spot rates. A generalized autoregressive conditional heteroskedasticity exchange rate equation is used to measure the impact of intervention on exchange rate uncertainty. This study finds that intervention is associated with a significant increase in the interday conditional variance (uncertainty) of both bilateral spot exchange rates. This supports the view of Friedman and Schwartz that exchange rate intervention serves to destabilize the foreign exchange market by introducing additional levels of exchange rate uncertainty.     

外汇市场干预信号渠道与投机头寸相关性研究

文章主要通过研究外汇市场干预操作与货币政策改变之间是否存在相关性,来考察中央银行在外汇市场上进行冲销干预的效果。在央行拥有内部信息,投机者拥有基本面私有信息的条件下,文章使用GARCH时间序列模型,以期货市场上能够反映市场参与者对公开及私有信息理解的投机净头寸(变化)数据作为预期的代理变量展开分析。文章的结论不支持信号渠道,外汇市场上的可预期干预结果更可能与央行期望的干预方向相反,并且过去的投机者净头寸持有量可以促使干预发生。     

汇率制度能影响外汇市场压力和央行干预吗

按照Stavarek（2007）的方法和标准,分别计算了2002年1月到2011年12月期间人民币对美元的外汇市场压力及中央银行干预指数。结果显示,人民币实行参考一篮子货币的汇率制度与盯住美元的汇率制度相比,不仅没有减轻外汇市场压力,反而加大了外汇干预压力。汇率制度不是影响外汇市场压力的决定因素,但不同的汇率制度却对我国央行外汇市场干预程度产生了较大的影响。在人民币实行参考一篮子货币的汇率制度下,央行干预程度明显降低,汇率决定的市场化程度相应提高。     

A new approach to the effect of intervention frequency on the foreign exchange market: evidence from Japan

This article estimates and analyses the effect of intervention frequency on the yen/dollar market, using daily intervention data. We examine using a nonlinear methodology, with the frequency of intervention from April 1991 to December 2005 as a focal explanatory variable. In this article, we also introduce a flexible target zone model that is capable of characterizing the dynamic behaviour of an exchange rate implied by the original target zone model of Krugman and its modifications. The empirical results show the importance of considering the threshold effect when analysing the effect of intervention due to the presence of asymmetry in the foreign exchange market. Moreover, we show that a high frequency intervention stabilizes the exchange rate by reducing exchange rate volatility, especially when the yen appreciates.     

Sterilised Interventions within a Heterogeneous Expectation Exchange Rate Model: Evidence from the Reserve Bank of Australia

In this article, we study the effectiveness of central bank intervention within a heterogeneous expectation exchange rate model for the Reserve Bank of Australia. The empirical evidence is gathered by applying a Markov‐switching approach to daily A$/US$ exchange data from December 1983 to April 2008. Our results support both chartist and fundamentalist regimes. It is shown that the two regimes are persistent and that the fundamentalist regime is riskier. Moreover, interventions when the chartist regime prevails increase the proportion of fundamentalists and thus exert a stabilising effect on the foreign exchange market.     

Post–Plaza intervention in the DEM/USD exchange rate

In this paper, whether specific methods of conducting central bank interventions increase the likelihood of achieving its objectives in analysed. Daily Bundesbank and Fed intervention data covering the entire Post–Plaza period are used to estimate binary choice models over the sample of observations when at least one of the two central banks were intervening. The results suggest that central banks can, in fact, improve the likelihood of success primarily through coordination and that unilateral intervention conducted by the Bundesbank appears to have been destabilizing. Furthermore, it is shown that relatively infrequent intervention has a higher likelihood of success. JEL classification: E58, F31, F42, G15
Intervention dans le monde du taux de change dollar/mark après l'Accord de Plaza. Ce mémoire explore la question à savoir si des méthodes spécifiques d'intervention par la banque centrale accroissent la probabilité que les objectifs soient atteints. A l'aide de données sur l'impact des interventions de la Bundesbank et de la Federal Reserve pour toute la période qui a suivi l'Accord de Plaza, on calibre les modèles de choix binaires pour l'échantillon des données quand au moins l'une des deux banques centrales est intervenue. Les résultats suggèrent que les banques centrales peuvent en fait améliorer la probabilité de succès dans la poursuite des objectifs via la collaboration et que les interventions unilatérales de la Bundesbank semblent avoirété déstabilisantes. De plus, il semble que des inteerventions relativement moinsfréquentes ont une plus grande probabilité de succès.     

Unconventional monetary policy and the dollar–euro exchange rate: further evidence from event studies

New evidence is presented on the impact on the US dollar–euro (USD–EUR) exchange rate of the unconventional monetary policy conducted by the US Federal Reserve (FED) and the European Central Bank (ECB). To that end, we employ an event study approach using daily the USD–EUR exchange rate for the period from 2 January 2007 to 31 January 2015. Our results indicate that the announcement and subsequent implementation of such measures by the ECB would have caused in general an appreciation of the dollar, while those by the FED would have caused a depreciation of the dollar.     

How can a strong currency or drop in oil prices raise inflation and the black-market premium?

Based on the case of Venezuela, an oil exporter with a multiple exchange rate regime, this paper explains two counterintuitive phenomena. First, a fall in oil revenue can drive a steep rise in inflation by reducing foreign exchange for imports and raising the fiscal deficit financed by money growth. Second, when foreign exchange is rationed, a devaluation of the official exchange rate could produce a transitory fall in inflation by reducing the fiscal deficit and subsidies for buying foreign exchange. The paper also shows that the black market exchange rate can be rising far faster than overall inflation if it is driven by prices in the most distorted goods markets. The channels emphasized in this paper for determining inflation and the black market exchange rate are novel in the literature and may provide avenues of future research on commodity exporters and foreign exchange constraints.     

Modelling the impact of central bank intervention on exchange rate volatility under inflation targeting

This article empirically investigates the effect of central bank’s foreign exchange interventions on the level and volatility of the Uganda shilling/US dollar exchange rate (UGX/USD) under an inflation-targeting regime. Utilizing daily data spanning the period 1 September 2005, to 31 December 2015, we estimate a foreign exchange intervention model within a GARCH theoretic framework. Empirical results indicate that foreign exchange interventions have had mixed impact on the volatility of the exchange rate. We find that inflation targeting is capable of curbing temporary exchange rate shocks. Empirical results indicate that while order flow is capable of reducing exchange rate volatility, an increase in the operating target rate, the 7-day interbank rate tends to exacerbate exchange rate volatility. Our empirical results are robust to alternative model specifications. We argue that inflation targeting is an effective monetary policy tool for curbing exchange rate volatility.     

Does foreign exchange derivatives market promote R&D? International industry-level evidence

Efficient financial markets can motivate and nurture innovation. The foreign exchange derivatives (FXD) market, an important part of financial markets, provides instruments to hedge profits from currency fluctuations. However, whether and how FXD market development benefits innovation remains unclear. Using data from a sample of 45 developed and emerging economies, this paper is among the first to examine the impact of the development of the FXD market on industry-level research and development (R&D) investment. We find that a better-developed FXD market significantly enhances industry-level R&D investment, especially in emerging economies. When the average daily FXD turnover that measures FXD market development increases by one standard deviation, industry-level R&D expenses increase by 27% in the following year. This effect is more significant for industries with higher foreign exchange rate risk. Policymakers should consider the benefits of developing the FXD market to the real economy when optimising FXD regulations.     

Exploring the interaction between stock price index and exchange rates: an asymmetric threshold approach

This article examines the impact of stock market news on the foreign exchange markets of USA, Canada and UK, employing an innovative extension of the asymmetric threshold model of Apergis and Miller (2006). Under this framework we can disentangle the reaction of foreign exchange market to bad or good news and small or large news of stock returns. Our comprehensive daily data-set spans the period from January 1990 to June 2014. Using a cointegration and error correction model, we document the existence of a causal relationship between stock market and foreign exchange markets. Most interestingly, our results derived from the asymmetric threshold model confirm that the relationship between stock and foreign exchange markets is sensitive to short-term good or bad news and short-term small or large news. Our findings entail significant implications for policymakers, governments, risk managers and international investors.     

货币政策冲击、外汇干预与汇率 变动的同期与动态关联研究

本文采用SVAR模型以及2005年7月至2011年12月的月度数据，研究了2005年的新汇率改革之后，我国货币政策冲击、外汇干预与汇率间的动态关联。主要发现与结论如下：在货币政策冲击、外汇干预与汇率三者的同期博弈中，外汇干预不能即刻影响同期汇率。利率的上升及广义货币供应量的变动均会对同期名义有效汇率造成一定影响，但不太显著。在三者的动态博弈中，外汇干预是非冲销和有效性得到验证，外汇干预信号的假设可以成立。此外，即使利率的变动并不针对汇率，却带来汇率的大幅波动。名义有效汇率的上升可以有效抑制消费价格指数（CPI）的提高，并且数量型货币政策容易造成CPI的反弹。本文针对研究结论提出了一些政策建议。     

A correlated bivariate Poisson jump model for foreign exchange

This paper develops a new bivariate jump model to study jump dynamics in foreign exchange returns. The model extends a multivariate GARCH parameterization to include a bivariate correlated jump process. The conditional covariance matrix has the Baba, Engle, Kraft, and Kroner (1989) structure, while the bivariate jumps are governed by a Correlated Bivariate Poisson (CBP) function. Using daily data we find evidence of both independent currency specific jumps, as well as jumps common to both exchange rates of the Canadian dollar and Japanese Yen against the U.S. dollar. The paper concludes by investigating a time-varying structure for the arrival of jumps that relaxes the assumption of constant and bounded jump correlation imposed by the CBP function.I am indebted to two anonymous referees and the editor, Baldev Raj for helpful suggestions. I am also grateful for helpful comments from Adolf Buse, Ramazan Gencay, Rehim Kilic, John Maheu, Alex Maynard, Denis Pelletier, Denise Young, and seminar participants at the Tenth Annual Symposium of the Society for Nonlinear Dynamics and Econometrics (SNDE), Federal Reserve Bank of Atlanta 2002; the Midwest Econometrics Group (MEG) Meetings, Federal Reserve Bank of Kansas City 2001; Canadian Economics Association (CEA) Meetings, McGill University 2001.     

Exchange rates change,asset-denominated currency difference and stock price fluctuation

This paper examines differences in the connectedness between exchange rates and stock prices for companies with different asset currencies on the Hong Kong stock market, and it seeks to explain those differences by proposing a hypothesis on asset-denominated currency difference. Under a framework of investor heterogeneity, we establish a dynamic, discrete theoretical model to analyse the connectedness between exchange rates, the stocks of local Hong Kong companies, the stocks of companies from the mainland and foreign exchange interventions. Using monthly data from January 2000 to August 2018, we adopt the time-varying parameter vector auto-regression (TVP-VAR) model to empirically study the dynamic relationships between exchange rates and the prices of both Hong Kong-based and mainland-based stocks. The results show significant differences in the ways that exchange rates and prices for the two types of stocks are linked. The exchange rates are positively correlated with mainland stocks and negatively correlated with Hong Kong stocks. Moreover, foreign exchange intervention is found to be an effective means for stabilising exchange rates, although such intervention tends to increase stock volatility.

Abbreviations: TVP-VAR - time-varying parameter vector auto-regression model; MCMC - Monte Carlo-Markov Chain method.     

外汇干预与就业、宏观经济增长研究——以1994—2007年中国外汇干预实证研究为例

文章通过构建理论模型对外汇干预与就业、宏观经济增长之间的互动关系进行了研究,认为中央银行应能从外汇干预中获得正收益,同时外汇干预能有效降低就业与经济增长过程中大幅波动的可能性.在理论模型的基础上,文章对1994-2007年间中国外汇干预政策实施效果进行了实证研究,主要结论为与理论模型基本一致:市场化的人民币外汇干预会导致央行正向的干预收益,同时降低就业与经济增长的渡动性.对于目前受到国际次贷危机影响的中国经济来说,采取更为灵活的外汇干预政策应是合理的政策选择.     

EMU and the transmission of monetary policy: evidence from business lending rates

This paper analyses the pass-through of money market rates to short-term and long-term business lending rates in the four largest euro area countries. The main findings of the paper are (1) that since the start of EMU loan rates appear to have become more responsive to money market rate changes in France, Italy and Spain, but not in Germany, and (2) that German loan rates are significantly more sluggish than loan rates in the other three large euro area countries. I also test for non-linear pass-through based on an asymmetric error-correction model but do not find much evidence of non-linearity in euro area interest rate pass-through.The views expressed in this paper do not necessarily represent the views of the Deutsche Bundesbank.     

Empirical Study of Scapegoat Theory Paradigm in the Exchange Rate Variable in the ASEAN 5

This paper attempts to explain empirically the effect of order flow as an unobserved variable on the exchange rate movements based on the theory of scapegoat. The theory of scapegoat appears as the answer to the imbalance in the relationship between macroeconomic fundamentals and the exchange rate. To analyze the validity of this theory in Indonesia, the Philippines, Malaysia, Singapore, and Thailand (ASEAN 5), we apply the two-stage least squares method. The empirical testing generates a fact that the paradigm of scapegoat theory works for four countries, namely Indonesia, Malaysia, Singapore, and Thailand. Another finding is that the theory of scapegoat does not work for the Philippines. The implication of policy based on the results is the emphasis of policy that enables intervention in the foreign exchange market, the enhancement of monetary policy transparency in each country, as well as the management of capital flows more efficiently.