An Analysis of Recent Studies of the Effect of Foreign Exchange Intervention

By Neely, Christopher J. | Federal Reserve Bank of St. Louis Review, November-December 2005 | Go to article overview

An Analysis of Recent Studies of the Effect of Foreign Exchange Intervention


Neely, Christopher J., Federal Reserve Bank of St. Louis Review


Two recent strands of research have contributed to our understanding of the effects of foreign exchange intervention: (i) the use of high-frequency data and (ii) the use of event studies to evaluate the effects of intervention. This article surveys recent empirical studies of the effect of foreign exchange intervention and analyzes the implicit assumptions and limitations of such work. After explicitly detailing such drawbacks, the paper suggests ways to better investigate the effects of intervention.

**********

Foreign exchange intervention is the practice of monetary authorities buying and selling currency in the foreign exchange market to influence exchange rates. Researchers have studied whether intervention is successful in influencing exchange rate movements and how it affects volatility. Secondarily, they have asked how the type of intervention affects these results and through which channels it might operate.

Intervention has several characteristics that complicate one's ability to study it. It is conducted sporadically, with several interventions over the course of a few days or weeks. Thus, it has an unusual distribution. Intervention policy is rarely stable for long periods. Finally, because intervention quickly reacts to exchange rate movements and other variables, exchange rates and intervention are determined simultaneously. These problems have made it difficult to show that central bank intervention has reduced exchange rate volatility or moved the exchange rate in the desired direction. Yet, every central banker surveyed in Neely (2000)--those who actually conduct intervention--remains convinced that intervention is effective in changing the exchange rate. (1)

Recently two phenomena have advanced our understanding of intervention. The first is the use of event studies to evaluate the effects of intervention. Generically, an event study is an examination of asset price behavior associated with some event, such as a merger, announcement, or intervention. Event studies are used to assess the market's reaction to the event, how the event influenced prices, and whether the market priced the event efficiently. The second advance is the use of high-frequency data--both exchange rates and intervention--to better understand the behavior of exchange rates immediately around intervention.

Despite these advances, inferring the effects of central bank intervention remains difficult. Although describing the data is a worthy and necessary goal, explaining the nature of the process by which exchange rates and intervention are jointly determined requires strong assumptions, which are rarely explicitly stated. While many intervention researchers are doubtless cognizant of such issues, those less familiar with the literature are probably not well aware of them. The purpose of this article is to selectively review the recent literature on the effects of intervention and to analyze the assumptions and limitations of such exercises. (2) Identifying the assumptions and limitations of the intervention literature is not to condemn those procedures. Rather such recognition enables the limitations to be better understood and overcome. This paper does not expend much effort describing the disparate conclusions of the literature. The appendix summarizes such conclusions and specific methods for interested readers.

This article first discusses central bank intervention practices and explains how researchers typically study intervention. Selected intervention studies are then discussed. The fourth section considers the assumptions behind intervention studies, with a special emphasis on the often implicit assumptions behind the new event-study methodologies. In its conclusion, the article discusses the strengths and weaknesses of the methods of studying the effects of intervention and suggests avenues for future research.

CENTRAL BANK INTERVENTION

After the breakdown of the Bretton Woods system of fixed exchange rates in 1973, the Articles of the International Monetary Fund (IMF) were amended to provide that members "would collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

An Analysis of Recent Studies of the Effect of Foreign Exchange Intervention
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.