Conditional Efficacy of Sterilized Intervention

The noise-trading or coordination channel hypothesis implies that sterilized intervention in the foreign exchange market is effective if certain conditions are satisfied, but ineffective otherwise. The hypothesis is tested with a three-regime threshold model and daily data on actual intervention by US and German central banks. The main finding is that if central banks choose the optimal timing in light of the trend-chasing behaviors of noise traders, such strategic intervention is effective in moving the exchange rate in the desired direction.