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Bundesbank intervention effects through interest rate policy |
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| Authors: | G Geoffrey Booth Fred R Kaen Gregory Koutmos Heidemarie C Sherman |
| Institution: | 1. Eli Broad Graduate School of Management, 315 Eppley Center, Michigan State University, East Lansing, MI 48824-1121, USA;2. University of New Hampshire, Durham, NH, USA;3. Fairfield University, Fairfield, CT, USA;4. Referat Geld und Kredit, IFO, Munich, Germany;1. Department of Economics, University of Texas at Arlington, Arlington, TX 76019, USA;2. Department of Finance, California State University, Long Beach, Long Beach, CA 90840, USA;1. Banco de Portugal, Research Department, Av. Almirante Reis 71, 1150-012 Lisbon, Portugal;2. Banca d’Italia, Servizio Studi, Via Nazionale 91, 00184 Rome, Italy;1. School of Business, Manhattan College, Manhattan College Parkway, Riverdale, NY 10471, USA;2. Department of Economics and Finance, University of Dayton, 300 College Park, Dayton, OH 45469-2251, USA |
| Abstract: | This paper investigates the effects of the changes in the Bundesbank's discount and Lombard interest rates on the volatility of European Union country exchange rates relative to the German mark during 1987–93. The first year of the sample period contains the last major realignment in the ERM before its ‘breakdown’ in 1993. Using a parsimonious EGARCH model, we find that the conditional volatility of these exchange rates increased in response to interest rate changes, regardless of the rate change direction. This finding is in direct conflict with Bundesbank's public statements that indicate that its interest rate policy was designed to calm its foreign exchange markets. |
| Keywords: | Exchange rate Intervention Bundesbank |
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