The effectiveness of foreign exchange intervention: The case of Canada
A large body of empirical work on the effectiveness of foreign exchange interventions suggests that sterilized intervention operations cannot systematically influence the path of the exchange rate between currencies. The purpose of this dissertation is to shed new light on the issue by following an approach pioneered by Dominguez and Frankel. In a simple two-equation model sterilized foreign exchange intervention can affect the exchange rate through a portfolio-balance channel and an expectations channel. The dataset used to analyze the effectiveness of intervention operations by the Bank of Canada between 1987 and 1991 contains survey data on exchange rate expectations which allows to explicitly include expectations in the estimation. To capture the influence of publicly available information about intervention operations on exchange rate expectations an intervention variable was created from several years of market reports in the financial press. The dissertation finds evidence of the existence of a portfolio-balance channel and an expectations channel for the transmission of intervention operations to the exchange rate. It is found that a publicly available report of an intervention operation by the Bank of Canada intervention operations could move the exchange rate by up to 3.8%. However, it is also found that the effectiveness of sterilized intervention is not stable over time and that it can in fact produce a perverse result which calls into question the usefulness of foreign exchange intervention as policy instrument.
|Year of publication:||
|Authors:||Krygier, Markus Maximilian|
Wayne State University
|Type of publication:||Other|
ETD Collection for Wayne State University
Persistent link: https://www.econbiz.de/10009431768
Saved in favorites
Similar items by subject
Find similar items by using search terms and synonyms from our Thesaurus for Economics (STW).