Annoucements, Financial Operations of Both ? Generalizing Central Banks’ FXReaction functions

Mardi | 2010-05-25

Oscar BERNAL – Jean-Yves GNABO – Yannick LUCOTTE

This paper generalizes the reaction functions of central banks’ FX interventions to include oral inter-ventions alongside actual ones. Using Japanese data for the 1991-2004 period, we estimate an orderedprobit model explaining the occurrence of each type of intervention and evaluating the extent to whichoral and actual interventions are substitutes or complements. In addition, the effectiveness of interven-tions is examined using an event-study approach. Our results indicate that the Japanese authoritiestended to adopt progressively stronger measures as the exchange rate was found to behave in an in-creasingly unfavorable way. This suggests that words and deeds were only coordinated (i.e. used in acomplementary way) in extreme cases. Overall, interventions are found to be moderately successful incorrecting unwanted exchange-rate developments, especially volatility.