Central Bank Intervention

and UPF offered valuable comments and suggestions. I am grateful to William Sundstrom for providing me with the dataset used in and to Martin Parkinson for sharing the dataset used in . Any remaining errors are mine. Marta Araque, and Laura Agustí from the GPEFM office provided invaluable administrative support. The people in Barcelona and Los Angeles who helped me with advice and support in all the ups and downs of a doctorate are my officemates, flatmates,

There is a growing confidence in policy, business and finance circles about Indonesia's ability to withstand global economic and financial shocks, and a renewed belief in domestic sources of growth. Despite uncertainty in Europe and slower than expected recovery in the US, Indonesia is well placed for moderately high growth in the medium term, and economic stability in the shorter term. At the end of June 2011, foreign reserves were at a record high, inflation was down, annual growth was steady at 6.5%, and investmentespecially foreign direct investment (FDI) -was up significantly. Consumer price inflation had fallen to just below 5% by August, from double-digit levels earlier in the year. This was due partly to low food prices and success in sterilising the effects of capital inflows. However, turmoil in international markets led to a sharp fall in the Indonesia stock exchange index and a mild currency depreciation in August-September, prompting central bank intervention in the foreign exchange market. Fiscal policy has remained conservative, aiming for a balanced budget by 2014. However, the government has still not moved to reduce growing fuel and energy subsidies. While the service sectors have continued to record high rates of growth, there has been a revival of manufacturing in 2011. This is partly underpinned by strong inflows of FDI, and is especially evident in the labour-intensive textiles, clothing and footwear industries after a decade of stagnation. Multinationals have announced plans to expand operations in Indonesia in the past six months to take advantage of new tax incentives. Overseas investors have also been attracted by Indonesia's growing middle class -a result partly of higher rural incomes driven by the commodity boom outside Java. Some recent ministerial announcements about initiatives to promote domestic industry have a protectionist flavour. A cabinet reshuffle in October may signal a more dirigiste approach to industrial policy -especially the shifting of internationally respected economist Mari Pangestu from the trade portfolio to that of tourism and creative economy. One important outcome of recent growth has been falling unemployment rates. However, youth unemployment remains a major problem, and efforts to overcome it have been fragmentary. A recent ban on overseas migration of domestic helpers (maids) seems certain to add to labour supply pressures among young people. The government is now considering how to mobilise its large population base, abundant natural resources and strategic location to play a greater role in the world economy. These assets are central to the ambitious 'Master Plan' for longer-term development (2011-25), announced in May. It focuses on developing the resource-rich Outer Island regions, with massive investments in energy and 'connectivity' to link the major centres and islands with each other, and centres with their hinterlands. Funding (to come mainly from the private sector), implementation and coordination are all major challenges.

There is a growing confidence in policy, business and finance circles about Indonesia's ability to withstand global economic and financial shocks, and a renewed belief in domestic sources of growth. Despite uncertainty in Europe and slower than expected recovery in the US, Indonesia is well placed for moderately high growth in the medium term, and economic stability in the shorter term. At the end of June 2011, foreign reserves were at a record high, inflation was down, annual growth was steady at 6.5%, and investmentespecially foreign direct investment (FDI) -was up significantly. Consumer price inflation had fallen to just below 5% by August, from double-digit levels earlier in the year. This was due partly to low food prices and success in sterilising the effects of capital inflows. However, turmoil in international markets led to a sharp fall in the Indonesia stock exchange index and a mild currency depreciation in August-September, prompting central bank intervention in the foreign exchange market. Fiscal policy has remained conservative, aiming for a balanced budget by 2014. However, the government has still not moved to reduce growing fuel and energy subsidies. While the service sectors have continued to record high rates of growth, there has been a revival of manufacturing in 2011. This is partly underpinned by strong inflows of FDI, and is especially evident in the labour-intensive textiles, clothing and footwear industries after a decade of stagnation. Multinationals have announced plans to expand operations in Indonesia in the past six months to take advantage of new tax incentives. Overseas investors have also been attracted by Indonesia's growing middle class -a result partly of higher rural incomes driven by the commodity boom outside Java. Some recent ministerial announcements about initiatives to promote domestic industry have a protectionist flavour. A cabinet reshuffle in October may signal a more dirigiste approach to industrial policy -especially the shifting of internationally respected economist Mari Pangestu from the trade portfolio to that of tourism and creative economy. One important outcome of recent growth has been falling unemployment rates. However, youth unemployment remains a major problem, and efforts to overcome it have been fragmentary. A recent ban on overseas migration of domestic helpers (maids) seems certain to add to labour supply pressures among young people. The government is now considering how to mobilise its large population base, abundant natural resources and strategic location to play a greater role in the world economy. These assets are central to the ambitious 'Master Plan' for longer-term development (2011-25), announced in May. It focuses on developing the resource-rich Outer Island regions, with massive investments in energy and 'connectivity' to link the major centres and islands with each other, and centres with their hinterlands. Funding (to come mainly from the private sector), implementation and coordination are all major challenges.

This paper analyses the effects of sterilised, intraday foreign exchange market operations (non-discretionary and discretionary) on foreign exchange returns and volatility in four inflation targeting economies in Latin America. The distribution of exchange rates during intervention and non-intervention days are first compared, and then event study regressions are used to estimate the impact of intervention (and macro surprises) on exchange rate returns and exchange rate volatility as well as on foreign exchange market turnover (in Colombia). In general, the results suggest that the impact of both non-discretionary and discretionary operations is at times significant but transitory. However, an analysis of Chile's experience suggests that the announcement effects of even non-discretionary programmes may be significant and persistent.

This paper examines the effect of the Riksbank's currency market interventions on the level and the volatility of the USD/SEK and DEM/SEK exchange rates between 1993 and 1996. To model volatility both GARCH models and implied volatilities from currency options are used. Some support is found for the idea that interventions affect the exchange rate level during certain sub periods but overall the results are weak. Furthermore, in line with the findings for other countries, little empirical support is found for the hypothesis that central bank intervention systematically decreases exchange rate volatility.

This paper provides a unique examination of three separate regimes of Japanese currency interventions between 1991 and 2004. It is the …rst research to jointly test the coordination and signalling channels and the reaction function of central banks in an identi…ed structural framework. The empirical research also involves testing an innovative microstructure framework considering 'sentiment'and fundamental information. There are several important …ndings based on the analysis of the paper. Firstly, the shocks to the bond yield di¤erential are the key driving force of the dynamics of the JPY/USD exchange rate, and have a strong long-run impact on speculation and sentiment. Secondly, with respect to the reaction function of the central bank, the interventions happened in clusters, and were the reactions to sharp appreciations of the JPY appreciation. Between 2003 and 2004, the central bank also reacted to the large speculation position and high sentiment on the yen's appreciation. Thirdly, the signalling channel was e¤ective when the interventions were frequent. Fourthly, speculation and sentiment had strong e¤ects on the changes in the exchange rate, and the coordination channel worked when the changes in exchange rate volatility were slow.

This paper is the first attempt to assess the impact of official FOREX interventions of the three major central banks in terms of the dynamics of the currency components of the major exchange rates (EUR/USD and YEN/USD) over the period 1989-2003. We identify the currency components of the mean and the volatility processes of exchange rates using the recent Bayesian framework developed by . Our results show that in general, the concerted interventions tend to affect the dynamics of both currency components of the exchange rate. In contrast, unilateral interventions are found to primarily affect the currency of the central bank present in the market. Our findings also emphasize a role for interventions conducted by these central banks on other related FOREX markets.

We propose a new measure named the symbolic performance to better understand the structure of foreign exchange markets. Instead of considering currency pairs, we isolate a quantity that describes each currency's position in the market, independent of a base currency. We apply the k-means++ clustering algorithm to analyze how the roles of currencies change over time, from reference status or minimal appreciations and depreciations with respect to other currencies to large appreciations and depreciations. We show how different central bank interventions and economic and political developments, such as the cap on the Swiss franc to the euro enforced by the Swiss National Bank or the Brexit vote, affect the position of a currency in the global foreign exchange market.

The purpose of this study is twofold; firstly, the behavior of Turkish lira (TRL) forward rates against US Dollar (USD) and Euro will be evaluated; whether the interest rate parity holds and the market participants quote the forward foreign exchange rates according to the interest rate differentials. It is also analyzed whether the forward foreign exchange rate coincides with the spot exchange rate at the relevant maturity. Secondly, the unbiased forward rate hypothesis (UFH) is tested by the use of regression method. The finding is that for TRL against USD and Euro, the forward rate is a biased predictor of the future spot rate. Going the same way with the previous researchers, the source of the bias is examined. The explanations set by early researchers for the finding of bias in the forward markets for different currencies have been generally based on two different sets of explanations. The first category of explanation maintains the assumption of rational expectations and interprets the systematic component of the forward market's prediction errors as a risk premium. The second category attributes the systematic component of the forward rate's prediction errors to expectation errors on the part of market participants that are themselves systematic.

There is a growing confidence in policy, business and finance circles about Indonesia's ability to withstand global economic and financial shocks, and a renewed belief in domestic sources of growth. Despite uncertainty in Europe and slower than expected recovery in the US, Indonesia is well placed for moderately high growth in the medium term, and economic stability in the shorter term. At the end of June 2011, foreign reserves were at a record high, inflation was down, annual growth was steady at 6.5%, and investmentespecially foreign direct investment (FDI) -was up significantly. Consumer price inflation had fallen to just below 5% by August, from double-digit levels earlier in the year. This was due partly to low food prices and success in sterilising the effects of capital inflows. However, turmoil in international markets led to a sharp fall in the Indonesia stock exchange index and a mild currency depreciation in August-September, prompting central bank intervention in the foreign exchange market. Fiscal policy has remained conservative, aiming for a balanced budget by 2014. However, the government has still not moved to reduce growing fuel and energy subsidies. While the service sectors have continued to record high rates of growth, there has been a revival of manufacturing in 2011. This is partly underpinned by strong inflows of FDI, and is especially evident in the labour-intensive textiles, clothing and footwear industries after a decade of stagnation. Multinationals have announced plans to expand operations in Indonesia in the past six months to take advantage of new tax incentives. Overseas investors have also been attracted by Indonesia's growing middle class -a result partly of higher rural incomes driven by the commodity boom outside Java. Some recent ministerial announcements about initiatives to promote domestic industry have a protectionist flavour. A cabinet reshuffle in October may signal a more dirigiste approach to industrial policy -especially the shifting of internationally respected economist Mari Pangestu from the trade portfolio to that of tourism and creative economy. One important outcome of recent growth has been falling unemployment rates. However, youth unemployment remains a major problem, and efforts to overcome it have been fragmentary. A recent ban on overseas migration of domestic helpers (maids) seems certain to add to labour supply pressures among young people. The government is now considering how to mobilise its large population base, abundant natural resources and strategic location to play a greater role in the world economy. These assets are central to the ambitious 'Master Plan' for longer-term development (2011-25), announced in May. It focuses on developing the resource-rich Outer Island regions, with massive investments in energy and 'connectivity' to link the major centres and islands with each other, and centres with their hinterlands. Funding (to come mainly from the private sector), implementation and coordination are all major challenges.

We explicate an iron law of intergenerational transmission of income dispersion. The same mechanism that limited income disparities, as population and prosperity increased through much of the early industrial revolution, will now sharply exaggerate inequality. The reason is that, for the first time in human history, richer parents are having fewer surviving children. Moreover, the effects of this fact in a setting like the current, where average family size is small and economic growth is strong, are quite marked. The social contract implicit in free market liberalism may require ongoing policy intervention to lean against the scolding winds of inequality.

This paper reviews the monetary transmission mechanism in low income countries (LICs). We use monetary transmission in advanced and emerging markets as a benchmark to identify aspects of the transmission mechanism that may operate differently in LICs. In particular, we focus on the effects of financial market structure on monetary transmission. The weak institutional framework prevalent in LICs drastically reduces the role of securities markets and increases the cost of bank lending to private firms. Coupled with imperfect competition in the banking sector, this means that banks with chronically high excess reserves invest in domestic public bonds or (when possible) in foreign bonds. With the financial system not intermediating funds properly, the traditional monetary transmission channels (interest rate, bank lending, and asset price) are impaired. The exchange rate channel, on the other hand, tends to be undermined by central bank intervention in the foreign exchange market. These conclusions are supported by review of the institutional frameworks, statistical analysis, and previous literature.

This paper proposes rules for the control of interbank rate volatility under different interest corridor systems when volatility stems from interbank market frictions. Friction-induced volatility will occur if there is heterogeneity in two dimensions (across banks and time) with respect to the degree to which frictions change the relative attractiveness of banks' outside options to using the interbank market. Under a "floor" or "ceiling operating system" (asymmetric scheme), friction-induced volatility can be controlled by implementing a relatively wide interest corridor - which is the inversion of the traditional principle. Under a "standard corridor system" (symmetric scheme), the systematic control of friction-induced interbank rate volatility can never be achieved through corridor width adjustments but requires a switch to an asymmetric corridor scheme.

In this paper, we analyze the e¤ectiveness of the direct central bank interventions using a new e¤ectiveness criterion. To this aim, we investigate the e¤ects of central bank interventions (CBI) in a noise trading model with chartists and fundamentalists. We …rst estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value. Then, we investigate the role of central bank interventions for explaining the switching properties between the two types of agents. We …nd evidence that in the medium run, interventions increase the proportion of fundamentalists and therefore exert some stabilizing in ‡uence on the exchange rate.

This paper examines the key characteristics of foreign exchange intervention by the Reserve Bank of Australia in the period 1983-1997, which can be broken into five distinct phases. We investigate the changing effectiveness of daily intervention on the $US/$A exchange rate by decomposing the exchange rate response to the intervention into various separate components. We find contemporaneous positive correlation between the direction of intervention and the conditional mean and variance of exchange rate returns. We show that sustained and large interventions have a stabilising influence in the foreign exchange market in terms of direction and volatility. Without these interventions, the market would have moved further and exhibited more volatility.

and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights. • Users may download and print one copy of any publication from the public portal for the purpose of private study or research. • You may not further distribute the material or use it for any profit-making activity or commercial gain • You may freely distribute the URL identifying the publication in the public portal Chapter 1 frequent realignments. However, after the realignment of March 1983, France shifted away from its policy of budgetary stimulation. Since then, devaluations became rare, while, after January 1987 until very recently, no realignments occurred.' The perceived success of the system during this period, led to more concrete plans for the realisation of a European Monetary Union (EMU) by the Delors Committee (1989). Important questions were raised, such as the institutional setup and status of a European central bank and the speed at which the transition to an EMU should take place. Other problems of such a transition, which could have been addressed within the context of the literature on exchange rate bands, are the amount of reserves needed by the central banks and the trade-off between exchange rate variability and interest rate variability (see Svensson, 1991a), when the fluctuation margins of the exchange rates are reduced. The progress of monetary integration culminated in the Maastricht Treaty in December 1991, in which, among other things, the time-schedule for the transition to an EMU and the conditions for admission into this system were laid down. By then, already, the progress of monetary unification had weakened. Under the threat of inflation caused by the German unification, the Bundesbank raised interest rates, which had to be followed by the other EMS participants in order to avoid devaluation of their currencies. Furthermore, the criteria for admission to the EMU, as specified in the Maastricht Treaty raised serious doubts about the eligibility of some countries to participate in the EMU. Subsequently, the difficulties in the ratification process of the Treaty (witness the Danish rejection and the French referendum) were obviously too much for a number a central banks to knock down the massive speculations against their currencies. The British pound and the Italian lira, which had suffered from yeats of overvaluation, were forced to leave the system in September 1992. Within a few months time after that, the Spanish peseta, the Portugese escudo and the Irish punt have been devalued, while the French franc and the Danish kroner have been under have speculative pressure for some time. 1.2. Why managing exchange rates? An obvious question, which might have become relevant again with the recent developments in the EMS, is why one would want to have bands on the exchange rate or, more generally, why one would want to manage exchange rates at all. Despite its long history, the debate about the desirability of exchange rate management is still open both for policymakers and academics. ' The only change in this period occurred in January 1990, when the band on the Italian lira was reduced from tóo~o to }2.25"~0. Lttroduction 3 One of the main arguments in favour of flexible exchange rates is that they make it easier for economies to adjust to asymmetric shocks. Exchange rates can move fast in response to disequilibria and adjustment via a change in the exchange rate means that less, maybe more costly, adjustment is needed elsewhere in the economy. However, there is ample evidence that nominal exchange rates do not respond to deviations from purchasing power parity, at least not in the short run. For example, Mussa (1986), documents a positive correlation between nominal and real exchange rates for a broad group of countries. The correlation is stronger for more flexible nominal exchange rate regimes. Broadly speaking, the advocates of managed exchange rates fall into two camps (see Williamson, 1993). One group regards a commitment to a fixed exchange rate as providing a nominal anchor for the economy. This philosophy may have nurtured the attemps to suppress realignments in the EMS after January 1987. The other group regards exchange rate management as a device against destabilising speculation or erratic movements of nominal exchange rates from their equilibrium values. Williamson, therefore, argues that exchange rate management should be directed at targeting the real exchange rate around some fundamental equilibrium level (which is partly determined by purchasing power parity considerations; see also Williamson, 1985) and, in order to prevent speculative runs, providing enough flexibility to shift the target zone if this is required by changes in the equilibrium level. From this point of view, it was the wrong policy to defend the pound Sterling and the halian lira against a realignment, because they had deviated too far from their purchasing power parities. This view, however, denies the role of the EMS as a disciplinary device (cf Giavazzi and Pagano, 1988) on policymakers to keep inflation under control. By hanging their political prestige on avoiding devaluations against the Deutsche Mark, policymakers enhance the credibility of their commitment to the exchange rate band. A credible commitment to targeting one's own currency to a strong currency implies low money growth, low inflation and therefore moderate wage claims. The net result is the absence of a wage-price spiral with its distortionary losses. Therefore, a relevant question in taking a position between the two views is whether inflation differentials, which are a major determinant of the 'fundamental equilibrium exchange rate', are an endogenous phenomenon (a self-fulfilling wage-price spiral) or whether they are caused by asymmetric exogenous developments or by structural deficiencies in the economic system, such as an underdeveloped tax system. Unfortunately, it is beyond the scope of this thesis to pursue this question in greater detail. 4 Chapter 1 1.3. Modeling exchange rate bands To highlight how chapters 2 to fit within a more general picture, a very short overview is given of the literature on exchange rate bands. For a more complete overview, the reader is referred to Svensson (1992c), who assesses the ability of these models to explain the empirically observed behaviour of exchange rates in bands, and Bertola (1993), who provides a more general theoretical survey of continuous-time interven[ion models. There are several reasons for modeling exchange rate behaviour in a band explicitly, rather than treating the exchange rate as being completely fixed. In the first place, it is not clear for which bandwidth it is still safe to model the exchange rate as being fixed. Of course, the answer depends on the underlying problem that is being investigated. Secondly, by allowing for an explicit role of the band, one might address a number of interesting issues, which otherwise would be very difficult to investigate, concerning, for example, the optimal width of the band, optimal intervention policy inside the band, the transition from a band on the exchange rate to a fixed exchange rate, the relationship between the position in the band and the danger of a realignment, and predictabiliry of exchange rate changes based on past behaviour in the band. Explicit modeling of exchange rate bands originates from the literature on target zones, which were originally proposed as a zones for real exchange rates, in order to avoid that destabilising speculation would cause too large disparities of real exchange rates from their fundamental equilibrium values (Williamson, 1985; Krugman and Miller, 1992). Interventions are supposed to take place only at the boundaries of the target zone. Krugman (1991) was the first to develop a formal model of exchange rate behaviour in a target zone. In his standard target zone model, it is however the nominal exchange rate, rather than the real exchange rate, which is kept in a band by interventions at the boundaries. The main result is that, even without intervention now, the exchange rate is stabilised by the prospect of future interventions at the boundaries. The theoretical implications of the standard model have been worked out in detail. Svensson (1991a) studies interest rate differentials at infinitesimal maturity and shows that there is a trade-off between the instantaneous variabilities of [he exchange rate and the interest rate differential. Thus, if the width of the exchange rate band goes to zero, then the instantaneous interest rate differential variability gces to a positive limít. For narrow bands the asymptotic variability of the interest rate differential increases in the width, while for wide bands the asymptotic variabiliry decreases in the width. Svensson (1991a) also shows that, if the fundamental is a regulated Brownian motion without drift, then the unconditional exchange rate

This paper investigates the link between jumps in the exchange rate process and rumors of central bank interventions. Using the case of Japan, we analyze specifically whether jumps trigger false reports of intervention (i.e. an intervention is reported when it did not occur). Intraday jumps are extracted using a nonparametric technique recently proposed by Lee and Mykland (2008) and by Andersen et al. (2007b), and later modified by Boudt et al. (2011). Rumors are identified by using a unique database of Reuters and Dow Jones newswires. Our results suggest that a significant number of jumps on the YEN/USD have been falsely interpreted by the market as being the result of a central bank intervention. The paper has policy implications in terms of central bank interventions. We show that in times where the central bank is known to intervene, some investors may attach a lot of weight to central bank interventions as a source of exchange rate movement, leading to a false "intervention explanation" for observed jumps.

In this paper, we investigate the effect of central bank interventions on the weekly returns and volatility of the DEM/USD and YEN/USD exchange rate returns. In contrast with previous analyzes, we allow for regime-dependent specifications and investigate whether official interventions can explain the observed volatility regime switches. It is found that, depending on the prevailing volatility level, coordinated central bank interventions can lead to either a stabilizing or a destabilizing effect. Our results lead us to challenge the usual view that such interventions always imply increases in volatility. JEL Classifications: C22, E44, F31, G15.

This paper examines the key characteristics of foreign exchange intervention by the Reserve Bank of Australia in the period 1983-1997, which can be broken into five distinct phases. We investigate the changing effectiveness of daily intervention on the $US/$A exchange rate by decomposing the exchange rate response to the intervention into various separate components. We find contemporaneous positive correlation between the direction of intervention and the conditional mean and variance of exchange rate returns. We show that sustained and large interventions have a stabilising influence in the foreign exchange market in terms of direction and volatility. Without these interventions, the market would have moved further and exhibited more volatility.

This paper studies and assesses the impact of G3 Central Bank interventions on the DEM/USD exchange rate properties using daily realized moments of exchange rate returns (obtained from intraday data) for the period 1989-2001. Event studies in terms of the realized moments for the intervention day, the days preceding and following the intervention day illustrate the shape of this impact. Rolling regressions results for an ARFIMA model for realized moments are used to measure the intervention impact and characterize its significance. The analysis confirms previous findings of an increase of volatility after a coordinated Central Bank intervention. It highlights new findings on the timing and the persistence of coordinated interventions on exchange rate volatility, on important volatility spillovers, on the impact on exchange rate covariances and correlations and on skewness coefficients.

This paper analyses the effects of sterilised, intraday foreign exchange market operations (non-discretionary and discretionary) on foreign exchange returns and volatility in four inflation targeting economies in Latin America. The distribution of exchange rates during intervention and non-intervention days are first compared, and then event study regressions are used to estimate the impact of intervention (and macro surprises) on exchange rate returns and exchange rate volatility as well as on foreign exchange market turnover (in Colombia). In general, the results suggest that the impact of both non-discretionary and discretionary operations is at times significant but transitory. However, an analysis of Chile's experience suggests that the announcement effects of even non-discretionary programmes may be significant and persistent.

This paper examines the key characteristics of foreign exchange intervention by the Reserve Bank of Australia in the period 1983-1997, which can be broken into five distinct phases. We investigate the changing effectiveness of daily intervention on the $US/$A exchange rate by decomposing the exchange rate response to the intervention into various separate components. We find contemporaneous positive correlation between the direction of intervention and the conditional mean and variance of exchange rate returns. We show that sustained and large interventions have a stabilising influence in the foreign exchange market in terms of direction and volatility. Without these interventions, the market would have moved further and exhibited more volatility.

We use realized volatility to study the influence of central bank interventions on the yen/dollar exchange rate. Realized volatility is a technical innovation that allows specifying a system of equations for returns, realized volatility, and interventions without endogeneity bias. We find that during the period 1995 through 1999, interventions of the Japanese monetary authorities did not have the desired effect with respect to the exchange rate level and we measure an increase in volatility associated with interventions. During the period 1999 through 2004, the estimations are consistent with successful interventions, both in depreciating the yen and in reducing exchange rate volatility.

Central banks often intervene in the financial system to prevent crises. They frequently cite financial fragility or the contagion that might otherwise occur as a justification for their actions. This argument has traditionally been based on historical experience rather than a theoretical understanding of these phenomena. This paper discusses a theoretical framework for considering these issues and the role of central bank intervention.

We develop a simple model of the interbank market where banks trade a long term, safe asset. When there is a lack of opportunities for banks to hedge idiosyncratic and aggregate liquidity shocks, the interbank market is characterized by excessive price volatility. In such a situation, a central bank can implement the constrained efficient allocation by using open market operations to fix the short term interest rate. It can be constrained efficient for banks to hoard liquidity and stop trading with each other if there is sufficient uncertainty about aggregate liquidity demand compared to idiosyncratic liquidity demand.

This paper examines the key characteristics of foreign exchange intervention by the Reserve Bank of Australia in the period 1983-1997, which can be broken into five distinct phases. We investigate the changing effectiveness of daily intervention on the $US/$A exchange rate by decomposing the exchange rate response to the intervention into various separate components. We find contemporaneous positive correlation between the direction of intervention and the conditional mean and variance of exchange rate returns. We show that sustained and large interventions have a stabilising influence in the foreign exchange market in terms of direction and volatility. Without these interventions, the market would have moved further and exhibited more volatility.

This article investigates the impacts of transition process steering and the COVID19 pandemic on domestic forex market behavior. To do so, we conducted a comparative analysis based on various GARCH family models and the case of four African countries which adopted different transition paths from fixed to intermediary and/or floating regimes. Our main empirical result is that smooth and gradual transition allows for a better adaptation of the domestic market actors, resulting in improved liquidity management and shocks absorption than countries with forced regime switch. We also notice a significant fallout from the COVID19 pandemic on economies where the regime transition was abrupt as the domestic forex market became more sensitive to endogenous factors. Finally, we presented critical policy implications and some suggestions for future studies.

Capital controls and intervention in the foreign exchange market are two controversial policy options that many countries have adopted in the past in order to influence the exchange rate and moderate capital flows. The objective of this paper is to evaluate the effectiveness of these policies for depreciating the exchange rate, reducing its volatility, and moderating the exchange rate vulnerability to external shocks. The paper uses high frequency data from Colombia for the period 1993-2010, and a GARCH model of the peso/US dollar exchange rate return. The main findings indicate that neither capital controls nor central bank intervention used separately were successful for depreciating the exchange rate, but have the side effect of augmenting its volatility. Nonetheless, during the period 2008-2010 when both policies were used simultaneously, they were effective to produce a daily average depreciation of the exchange rate, without increasing its volatility.

Using a new approach relying on news wire reports, we estimate the proportion of secret interventions (i.e., unreported official interventions) in the foreign exchange markets that have been conducted by the three major central banks since 1985. We therefore revisit the estimation of conditional probabilities of secret operations and compute them by both central bank and operation type. The proportion of secret interventions is found to be lower for concerted operations and to display a great deal of variability over time as well as across the three major central banks.

This paper explores the effects of the recent interventions of the Bank of Japan on the level and volatility of the yen/dollar exchange rate. A special attention is devoted to the prominent features affecting the signal conveyed by these interventions. The results show a clear duality: small unilateral interventions are counterproductive while large and isolated ones influence the FX market in the desired directions. It is also found that the perverse effect is avoided through coordinated operations.

Substantial empirical research documents that exchange-rate forecasts are not formed rationally. This paper identi®es a common technical trading signal, the head-and-shoulders pattern, as a potential source of departures from rationality in exchange-rate forecasts. Forecasts based on this pattern are evaluated for daily dollar exchange rates over 1973 to 1994, using two criteria for rationality: pro®tability and ef®ciency. Resulting pro®ts, replicable in real-time, are tested for statistical signi®cance using a bootstrap technique. We ®nd that the rule is pro®table, but not ef®cient, since it is dominated by simpler trading rules.

The primary goal of the ILO is to work with member States towards achieving full and productive employment and decent work for all. This goal is elaborated in the ILO Declaration 2008 on Social Justice for a Fair Globalization, 1 which has been widely adopted by the international community. Comprehensive and integrated perspectives to achieve this goal are embedded in the Employment Policy Convention of 1964 (No. 122), the Global Employment Agenda (2003) and-in response to the 2008 global economic crisis-the Global Jobs Pact (2009) and the conclusions of the Recurrent Discussion Reports on Employment (2010 and 2014). The Employment Policy Department (EMPLOYMENT) is engaged in global advocacy and in supporting member States in placing more and better jobs at the center of economic and social policies and growth and development strategies. Policy research and knowledge generation and dissemination are essential components of the Employment Policy Department's activities. The resulting publications include books, country policy reviews, policy and research briefs, and working papers. 2 The Employment Policy Working Paper series is designed to disseminate the main findings of research on a broad range of topics undertaken by the branches of the Department. The working papers are intended to encourage the exchange of ideas and to stimulate debate. The views expressed within them are the responsibility of the authors and do not necessarily represent those of the ILO.

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper reviews monetary transmission mechanisms in low-income countries (LICs) to identify aspects of the channels that may operate differently in LICs relative to advanced and emerging economies. Given the weak institutional frameworks, reduced role of securities markets, imperfect competition in the banking sector and the resulting high cost of bank lending to private firms, the traditional channels (interest rate, bank lending, and asset price) are impaired in LICs. The exchange rate channel is also undermined by central bank intervention in the foreign exchange market. These conclusions are supported by review of the institutional frameworks, statistical analysis, and previous literature.

The adoption of a managed regime assumes that interventions are relatively successful. However, while some authors consider that foreign exchange interventions are ineffective, arguing that domestic and foreign assets are close substitutes, others advocate their use and maintain that their effects can even last for months. There is also a lack of consensus on the related question of how to intervene. Are dirty interventions more powerful than pre-announced ones? This paper compares the effects of day-today interventions with discretionary interventions by combining a Tobit-GARCH reaction function with an asymmetric power PGARCH(1,1) impact function. Our results show that the impact of pre-announced and transparent US$ 20 million daily interventions, adopted by Colombia in 2008-20-12, has been much larger than the impact of dirty interventions adopted in 2004-2007.We find that the impact of a change in daily interventions

The paper investigates the effects of central bank interventions in financial markets, composed of asymmetrically-informed rational investors and noise traders. If the central bank suspects a bubble, it should lift the real risk-free rate to deflate the bubble in “leaning against the wind”. A rise in the real risk-free rate reduces the risk of rational informed investors, and increases the risk of rational uninformed investors. If the central bank intervenes through the nominal risk-free rate and the Fisher arbitrage condition holds, an increase in the nominal rate is transferred to inflation, thereby dampening the policy effect. Conversely, this implies that the central bank can also deflate the bubble by inducing a reduction in inflationary expectations. The effect on the informed investor risk remains ambiguous, while the risk of he uninformed investor grows, but only if they suffer from money illusion.

Although data limitations prevents us from drawing very general results in terms of time and country samples, our empirical investigation shows that central bank interventions can significantly raise the heterogeneity of monthly expectations at the 1 month, 3 months and 12 months horizons in the case of official (especially unexpected) interventions (DEM-EUR/USD) or of expected interventions and "false" rumours (JPY/USD). Hence, central bank intervention can be viewed as able to move market opinions, albeit in a way which is different for the two markets.

Although data limitations prevents us from drawing very general results in terms of time and country samples, our empirical investigation shows that central bank interventions can significantly raise the heterogeneity of monthly expectations at the 1 month, 3 months and 12 months horizons in the case of official (especially unexpected) interventions (DEM-EUR/USD) or of expected interventions and "false" rumours (JPY/USD). Hence, central bank intervention can be viewed as able to move market opinions, albeit in a way which is different for the two markets.

The article pioneers the designing of a theoretical model for the optimal foreign exchange intervention in Iran. The model used is a nonlinear dynamic programming model with stochastic continuous functions to solve which the Uhlig program has been used. The results indicate that determining the best volume of intervention depends on the economic objectives of policymakers, the exchange rate of the present time, and the future exchange rate expected by the monetary authorities. Due to the monopolistic condition of the government in the foreign exchange market, the volume of the foreign exchange intervention in the market depends on the level the government is trying to keep the exchange rate at the present time as well as the next period. The exchange rate in Iran is not solely determined on the basis of the market mechanisms; therefore, the determinant of the volume of intervention by the monetary authority at the present time is the level that the government attempts to keep the exchange rate at present and in the future. The present and future levels of the exchange rate depend on the government budget expenditures. This in turn depends on the government size and its reliance on foreign exchange revenues received from the sale of oil.

Using disaggregated quarterly trade data for Switzerland over 2004-2011, we study exchange rate pass through (ERPT) into imported intermediate input prices and its role in the price setting behavior of exporters. We explicitly include disaggregated proxies for imported input prices in our analyses to investigate whether Swiss exporters may have naturally hedged exchange rate risks by sourcing inputs from abroad, especially during periods of strong CHF appreciation. Our results indicate high ERPT into imported input prices in all sectors and strong sectoral ERPT heterogeneity on the export side in both the short and long-run. They also suggest the use of natural hedging as an eective strategy to reduce exchange rate risks. Signicantly however, Swiss exporters may not have adjusted export pricing practice in response to a strong CHF in the wake of the Euro crisis, which questions central bank intervention during that period.

This paper provides econometric evidence of the interest parity puzzle in Serbia over the period 2005-2016. Econometric findings are derived from the following techniques: long-run parameter estimation based on the autoregressive distributed lag model, impulse response function computed from the bivariate vector autoregressive model, and estimation of the two-regime Markov switching parameter model. Our results indicate that a positive interest differential corrected for country risk leads to significant dinar appreciation against the euro. The intensity of this impact is different across sub-periods of low exchange rate variability and high variability. Exchange rate movements are found to appreciate more strongly during lower variability episodes. Preliminary econometric investigation of four other European emerging economies documents similar findings only for Romania. Our results suggest that there is a huge incentive for shortterm carry trades in Serbia, regardless of substanti...

This paper presents a model of exchange rate determination in which the forward premium anomaly emerges as the result of unanticipated central bank interventions in the foreign exchange market. Deviations from uncovered interest parity (UIP) therefore represent neither unexploited profit opportunities nor compensation for bearing risk. In simulations, the model generates a forward premium anomaly and matches several other notable features of US-German data. Additional empirical support is obtained from an analysis of Fed and Bundesbank interventions in the dollar-DM market where it is found that the forward premium anomaly intensifies during those times when a central bank intervenes.

This paper presents a model of exchange rate determination in which the forward premium anomaly emerges as the result of unanticipated central bank interventions in the foreign exchange market. Deviations from uncovered interest parity (UIP) therefore represent neither unexploited profit opportunities nor compensation for bearing risk. In simulations, the model generates a forward premium anomaly and matches several other notable features of US-German data. Additional empirical support is obtained from an analysis of Fed and Bundesbank interventions in the dollar-DM market where it is found that the forward premium anomaly intensifies during those times when a central bank intervenes.

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Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.

Higher order standardised moments Value-at-risk Gaussian mixtures Here, we analyse the behaviour of the higher order standardised moments of financial time series when we truncate a large data set into smaller and smaller subsets, referred to below as time windows. We look at the effect of the economic environment on the behaviour of higher order moments in these time windows. We observe two different scaling relations of higher order moments when the data sub sets' length decreases; one for longer time windows and another for the shorter time windows. These scaling relations drastically change when the time window encompasses a financial crisis. We also observe a qualitative change of higher order standardised moments compared to the gaussian values in response to a shrinking time window. Moreover, we model the observed scaling laws by analysing the hierarchy of rare events on higher order moments. We extend the analysis of the scaling relations to incorporate the effects these scaling relations have upon risk. We decompose the return series within these time windows and carry out a Value-at-Risk calculation. In doing so, we observe the manifestation of the scaling relations through the change in the Value-at-Risk level.

Here, we analyse the behaviour of the higher order standardised moments of financial time series when we truncate a large data set into smaller and smaller subsets, referred to below as time windows. We look at the effect of the economic environment on the behaviour of higher order moments in these time windows. We observe two different scaling relations of higher order moments when the data sub sets' length decreases; one for longer time windows and another for the shorter time windows. These scaling relations drastically change when the time window encompasses a financial crisis. We also observe a qualitative change of higher order standardised moments compared to the gaussian values in response to a shrinking time window. We extend this analysis to incorporate the effects these scaling relations have upon risk. We decompose the return series within these time windows and carry out a Value-at-Risk calculation. In doing so, we observe the manifestation of the scaling relations through the change in the Value-at-Risk level. Moreover, we model the observed scaling laws by analysing the hierarchy of rare events on higher order moments.

Here, we analyse the behaviour of the higher order standardised moments of financial time series when we truncate a large data set into smaller and smaller subsets, referred to below as time windows. We look at the effect of the economic environment on the behaviour of higher order moments in these time windows. We observe two different scaling relations of higher order moments when the data sub sets' length decreases; one for longer time windows and another for the shorter time windows. These scaling relations drastically change when the time window encompasses a financial crisis. We also observe a qualitative change of higher order standardised moments compared to the gaussian values in response to a shrinking time window. We extend this analysis to incorporate the effects these scaling relations have upon risk. We decompose the return series within these time windows and carry out a Value-at-Risk calculation. In doing so, we observe the manifestation of the scaling relations through the change in the Value-at-Risk level. Moreover, we model the observed scaling laws by analysing the hierarchy of rare events on higher order moments.

Here, we present a method for a simple GARCH (1,1) model to t higher order moments for di erent companies' stock prices. When we assume a Gaussian conditional distribution, we fail to capture any empirical data when tting the rst three even moments of nancial time series. We show instead that a mixture of normal distributions is needed to better capture the higher order moments of the data. To demonstrate this point, we construct regions (parameter diagrams), in the fourth-and sixth-order standardised moment space, where a GARCH (1,1) model can be used to t moment values and compare them with the corresponding moments from empirical data for di erent sectors of the economy. We found that the ability of the GARCH model with a double normal conditional distribution to t higher order moments is dictated by the time window our data spans. We can only t data collected within speci c time window lengths and only with certain parameters of the conditional double Gaussian distribution. In order to incorporate the nonstationarity of nancial series, we assume that the parameters of the GARCH model can have time dependence. Furthermore, using the method developed here, we investigate the e ect of the COVID-19 pandemic has upon stock's stability and how this compares with the 2008 nancial crash.