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Foreign Exchange Intervention

What is Foreign Exchange Intervention?

Definition and the Legal Status of Intervention Foreign exchange intervention is defined generally as foreign exchange transactions

conducted by the monetary authorities with the aim of influencing exchange rates. It is the

process by which the monetary authorities attempt to influence market conditions and/or the

value of the home currency on the foreign exchange market. Intervention usually aims to

promote stability by countering disorderly markets, or in response to special circumstances.

In Japan, the Minister of Finance is legally authorized to conduct intervention as a means to

achieve foreign exchange rate stability. In the United States, the Government and Federal

Reserve Board (FRB); in Euro Area, the European Central Bank (ECB); in the United

Kingdom, the Bank of England (BOE) operates it.

General Ideas of Foreign Exchange Market

Foreign Exchange Market To invest in other countries or to buy foreign products, firms and individuals may first need

to acquire the currency of the country with which they intend to deal with. In addition,

exporters may demand to be paid for their goods and services either in their own currency or

in U.S. dollars, which are accepted worldwide. The Foreign Exchange Market, or "Forex"

market, in which international currencies trades take place, is called foreign exchange

market.

Exchange Rate Each country has a currency in which the prices of goods and services are quoted - the dollar

in the United States, the euro in Germany, the pound sterling in Britain, the yen in Japan, etc.

Exchange rates play a central role in international trade because they allow us to compare the

prices of goods and services produced in different countries.

A foreign exchange rate is the relative value between two currencies. In particular, it is the

http://intl.econ.cuhk.edu.hk/topic/index.php?did=15



















quantity of one currency required to buy or sell one unit of the other currency. The exchange

rate can be quoted in 2 ways: as the price of the foreign currency in terms of home currency

(direct terms) or as the price of home currency in terms of foreign currency (indirect terms).

Three Exchange Rate Regimes In theory, there are three exchange rate regimes, namely flexile, intermediate and fixed.

Under a flexible currency regime, the external value of a currency is determined more or less

by the force of market supply and demand. Because floating exchange rate permitting enough

flexibility to adjust fundamental disequilibria under international supervision, it can prevent

competitive depreciation. On the other hand, under a fixed exchange rate arrangement, the

monetary authority pegs the domestic currency to one or a basket of foreign currencies.

Exchange rates between currencies that are set at predetermined levels and do not move in

response to changes in supply and demand. The authority has to intervene in the foreign

exchange market whenever the prevailing rate deviates from the specific one. Immediate

exchange rate arrangement has a medium flexibility lying between flexible and fixed.

The arguments in favor of purely floating exchange rate regime:

1. A simple laissez-faire view - exchange rate should be determined by private demand

and supply without government interference. 2. A parallel view - the exchange rate is easier to be adjusted to respond to the new

development of the economy than wages and prices, which are always assumed to

be sticky. 3. Policy independence - floating exchange rate is said to be able to equilibrate the

trade balance by altering the relative price of imports and exports, hence the amount

of imports and exports. So, the countries can pursue their internal economics goal

such as full employment, low inflation, independently.

The arguments in favor of purely fixed exchange rate:

1. Certainty of exchange rate - the exchange rate volatility is low under the fixed

exchange rate regime. This reduces the investment risk resulted in larger imports,

exports, lending and borrowing. Thus, stable exchange rate promotes international

trade. 2. Nominal anchor - fixed exchange rate is an effective way of providing a nominal

anchor to monetary policy. Pegging the exchange rate will convince people that

inflation is unlikely. Lower inflation expectation yields a lower actual inflation rate.

Role of Central Bank Under Different Exchange Rate Regimes

Under a fixed exchange rate regime For those countries with a fixed rate regime, operations in the foreign exchange market are

largely passive, with the central bank automatically clearing any excess demand or supply of

foreign currency to maintain a fixed exchange rate. When there is an increase in the demand

of foreign currency, central bank purchases the local currency against foreign currency.

When there is increase in the demand of foreign currency, central bank sells foreign currency

for local currency. Interest rates in the inter-bank market adjust to clear the market. Under

this system, both the stock and the flow of the monetary base must be fully backed by foreign

reserves. Hence, any change in the monetary base must be matched by a corresponding

change in reserves and the central bank is passive in intervening in the market.

Under a flexible exchange rate regime Although central banks in countries adopt flexible exchange rate regimes, they have still

retained discretion to intervene in the foreign exchange market. Governments concern on FX

rates because changes in the rates affect the value of products and financial instruments. As a

result, unexpected or large changes can affect the health of nations' markets and financial

systems, as well as inflation and economic growth. For example, if the Japanese yen rises in

value compared with the dollar, U.S. exports become less expensive for the Japanese to buy;

that could lead to an increase in U.S. exports and a boost to U.S. employment. At the same

time, the lower value of the dollar compared with the yen could raise U.S. import prices and

act as an inflationary influence in the United States.

Why Central Banks Intervene in the Foreign Exchange Market?

Minimizing Overshooting Effect The motivation for intervention decision has been widely researched and often discussed.

There is a general consensus that intervention may be warranted to stabilize the exchange rate

and provide liquidity to the market; and to correct an overshoot, in either direction, in the

exchange rate. Foreign exchange intervention is a tool used in the short-term to smooth the

transition in the exchange rate by minimizing overshooting when economic conditions are

changing or when the monetary authority believes that the market has misinterpreted

economic signals.

Reducing Exchange Rate Volatility Limiting the volatility in the exchange rate may be important due to the adverse effects it can

have on sentiment both within financial markets and the economy. Especially, when the

management of the exchange rate is the major tool for implementing monetary policy,

excessive short-term volatility can erode the market's confidence in the regime.

Central bank wants to reduce the volatility because volatility may impede international

investment flows. By adding risk to the rate of return on a foreign asset, exchange rate

volatility may reduce investment in foreign financial assets. In addition, companies may be

reluctant to build a new plant or purchase a foreign company if exchange rate uncertainty

reduces the expected profits from such projects. As a result, exchange rate volatility creates a

disincentive for domestic investment and inefficient allocation of resources in the world

economy.

Another reason why authorities may want to reduce volatility is that it may adversely affect

international trade. Stable currency can facilitate international trade by reducing investment

risk. Because volatile exchange rates create uncertainty about the revenues to be earned on

international transactions, such volatility could force companies to add a risk premium to the

costs of goods they sell abroad. If these costs are passed on to consumers in the form of

higher prices, the demand for traded goods could decrease. In addition, firms themselves may

be more reluctant to engage in international trade if exchange rate volatility adds an extra risk

to their profits.

A final reason to reduce exchange rate volatility is that it could spill over into the financial

markets. If exchange rate volatility increases the risk of holding domestic assets, the prices of

these assets could also become more volatile. The increased volatility of financial markets

could threaten the stability of the financial system and make monetary policy goals more

difficult to attain.

Leaning-against-the-wind Research and official pronouncements support the idea that monetary authorities with

floating exchange rates most often employ intervention to resist short-run trends in exchange

rates. The central bank intervenes the disorderly market to moderate the movements of the

exchange rate by providing support to either domestic or foreign currency. This kind of

intervening strategy is called "leaning-against-the-wind".

Correct Misalignment of Exchange Rate Another motivation of is to correct medium-term "misalignments" of exchange rates away

from "fundamental" values. Where the exchange rate depart from fundamentals - such as

moving the inflation rate outside of a target range - it may be appropriate to intervene in the

market. The stabilizing role that a central bank can bring to the market may be sufficient to

alter investor sentiment and move the exchange rate back towards equilibrium.

Profitability of Intervention There have been several empirical studies on the profitability of intervention for major

countries. One of the first was that published by Taylor (1982), which examined nine

industrial countries early in the floating period, from the early 1970s to the end of 1979.5

According to his estimates, central banks lost more than $US11 billion over the whole

period.

Several subsequent studies challenged Taylor's results, reworking his calculations using

several refinements. By lengthening the sample period and taking account of the interest

differential between investing in foreign currencies and the local currency, Argy (1982),

Jacobson (1983), and the Bank of England (1983) found that these large losses were in fact

profits. For the US, for instance, Jacobson estimated that total losses are around $US500

million for the 1973-79 period, but over the entire 1973-1981 period, net profits amounted to

almost $US300 million. Moreover, including a measure of net interest earnings increased

profits by up to $US470 million over the longer period.

The goal of foreign exchange intervention is to maintain orderly market conditions - to help

achieve macroeconomic goals like price stability or full employment. Therefore, profitability

of foreign exchange intervention is not a necessary condition for intervention.

Technical Trading Rule Profitability A strong and consistent result in international finance is the evidence that technical trading

rules - rules that use the information on past price to determine trading decisions - can

generate persistent profits in dollar exchange rate markets.

Among the trading rules, moving average is the one that receives most attention. The rule

attempts to filter the data to discover trends in exchange rates. It is also called double

moving-average rules (MA rules). A double moving average prescribes buying an asset - e.g.

a foreign currency-denominated bank deposit - if a moving average of past exchange rates

over a short time window is greater than a moving average of past exchange rates over a

longer time window. Conversely, if the short moving average is less than the long moving

average, the rule instructs that the trader should sell the asset.

Evidence has accumulated in recent years that technical analysis can be useful in the foreign

exchange market (Sweeney (1986), Levich and Thomas (1993), Neely, Weller and Dittmar

(1997)). This finding has challenged the efficient markets hypothesis, which holds that

exchange rates reflect information to the point where the potential excess returns do not

exceed the transactions costs of acting (trading) on that information (Jensen (1978)).

Causes of Volatility

In the previous section, we mentioned that one of the objectives of foreign exchange

intervention is to smooth the exchange rate volatility. But what are the causes and

consequences of this volatility?

Exchange rate volatility is often attributed to three factors: volatility in market fundamentals,

changes in expectations due to new information, and speculative "bandwagons".

Volatility in Market Fundamentals Volatility in market fundamentals, such as the money supply, income, and interest rates,

affects exchange rate volatility because the level of the exchange rate is a function of these

fundamentals. For example, large changes in the money supply can lead to changes in the

level of the exchange rate. Changes in the level of the exchange rate in turn imply exchange

rate volatility.

Changes in Expectations Changes in expectations about future market fundamentals or economic policies also affect

exchange rate volatility. When market participants receive new information, they alter their

forecasts of future economic conditions and policies. Exchange rates based on these forecasts

will also change, thereby leading to exchange rate volatility. For example, news about a

change in monetary policy may cause market participants to revise their expectations of

future money supply growth and interest rates, which could alter the level and hence the

volatility of the exchange rate.

Degree of Confidence In addition to being affected by expectations of future fundamentals and policies, volatility is

also affected by the degree of confidence with which these expectations are held. Exchange

rate volatility tends to rise with increases in market uncertainty about future economic

conditions and tends to fall when new information helps resolve market uncertainty.

Speculative Bandwagons Finally, exchange rate volatility can be caused by speculative bandwagons, or speculative

exchange rate movements unrelated to current or expected market fundamentals. For

example, if enough speculators buy dollars because they believe the dollar will appreciate,

the dollar could appreciate regardless of fundamentals. If speculators then think that the

market fundamentals will not sustain, active selling by the same speculators could cause the

dollar to depreciate. Fluctuation in the value of the dollar arising from such speculative forces

will contribute to exchange rate volatility.

Types of Foreign Exchange Intervention

Entrustment Intervention "Entrustment Intervention" means intervention that is conducted in overseas markets with

funds of local monetary authorities. It is different from the intervention that is conducted in

overseas markets with funds of respective foreign monetary authorities.

Reverse-Entrustment Intervention Similarly, when foreign monetary authorities need to intervene in a country's foreign

exchange market, say Tokyo market, the central bank of Japan can conduct interventions on

their behalf upon request. This is called "Reverse-Entrustment Intervention"

Concerted or Coordinated Intervention There are cases where two or more monetary authorities implement intervention jointly by

using their own funds at the same time or in succession. This is called "Concerted or

Coordinated Intervention." For instance, the Plaza Agreement in 1985 (a G5 meeting) and the

Louvre Accord in 1987 (a G7 meeting) were held for the discussion of multilateral

intervention to depreciate the overvalued US dollar and to restore equilibrium in current

account. These kinds of interventions are called concerted or coordinated intervention.

Sterilization and Non-sterilization Studies of foreign exchange intervention generally distinguish between intervention that does

or does not change the monetary base. The former type is called non-sterilized intervention

while the latter is referred to as sterilized intervention. Central banks sometimes carry out

equal foreign and domestic assets transaction in opposite directions to nullify the impact of

their foreign exchange operations on the domestic money supply. When a monetary authority

buys (sells) foreign exchange, its own monetary base increases (decreases) by the amount of

the purchase (sale). In order to prevent the money stock from increasing (decreasing), the

monetary authorities can sterilize the effect of the exchange market intervention by selling

(buying) short-term domestic assets to (from) the banking system leaving the monetary base

of the country unchanged. Since sterilized intervention does not affect the money supply, it

does not affect prices or interest rate and so does not influence the exchange rate. Rather,

sterilized intervention might affect the foreign exchange market through two routes: the

portfolio-balance channel and the signaling channel.

According to the portfolio-balance channel, it is assumed that risk-averse wealth holders

diversify their portfolio across assets denominated in different currencies. Let's use the

United States and Japan as an example. The portfolio balance channel theory holds that

sterilized purchases of yen raise the dollar price of yen because investors must be

compensated with a higher expected return to hold the relatively more numerous U.S. bonds.

To produce a higher expected return, the yen price of the U.S. bonds must fall immediately.

That is, the dollar price of yen must rise.

In contrast, the signaling channel assumes that intervention affects exchange rates by

providing the market with new relevant information, under an implicit assumption that the

authorities have superior information to other market participants. The authorities are willing

to reveal this information through their actions in the foreign exchange market. Because

private agents may change their exchange rate expectation after intervention, the exchange

rate then will be expected to change immediately after the effect occurs.

Spot and Forward Markets for Intervention There are two primary types of transactions in the FX (Foreign Exchange) market. An

agreement to buy or sell currency at the current exchange rate is known as a spot transaction.

By convention, spot transactions are settled two days later. In a forward transaction, traders

agree to buy and sell currencies for settlement at least three days later, at predetermined

exchange rates. The forward market transaction is often used by businesses to reduce their

exchange rate risk.

The previous example used in sterilization section is implicitly assumed that the Federal

Reserve Bank of New York conducted its purchase of yen in the spot market-the market for

delivery in two days or less. Other than intervention in spot market, it also may be carried out

in the forward market. Because the forward price is linked to the spot price through covered

interest parity, intervention in the forward market can influence the spot exchange rate.

Forward market interventions-the purchase or sale of foreign exchange for delivery at a

future date-have the advantage that they do not require immediate cash outlay. If a central

bank expects that the need for intervention will be short-lived and will be reversed, then a

forward market intervention may be conducted discreetly - with no observable effect on

foreign exchange reserves.

Both the spot and forward markets may be used simultaneously. A transaction in which a

currency is bought in the spot market and simultaneously sold in the forward market is

known as a currency swap. While a swap itself will have little effect on the exchange rate,

they can be used as part of an intervention. Some central banks used the swaps market to

sterilize spot interventions. In these transactions, the spot leg of the swap is conducted in the

opposite direction to the spot market intervention, leaving the sequence equivalent to a

forward market intervention.

The Options Market and Intervention The options market has also been used by central banks for intervention. A European style

call (put) option confers the right, but not the obligation to purchase (sell) a given quantity of

the underlying asset on a given date. Usually, the option contract specifies the prices for

which the asset may be bought or sold, called the strike or exercise price. Monetary

authorities seeking to prevent depreciation or devaluation of their currency may sell put

options on the domestic currency or call options on the foreign currency.

Indirect Intervention Recall that while official intervention is generally defined as foreign exchange transactions of

monetary authorities designed to influence exchange rates, it can also refer to other (indirect)

policies for that purpose. There are innumerable methods of indirectly influencing the

exchange. These methods involve capital controls (taxes or restrictions on international

transactions in assets like stocks or bonds) or exchange controls (the restriction of trade in

currencies)

Effectiveness of Central Bank Intervention

Most of the interventions were aiming at stabilizing the disorderly exchange rate market;

unfortunately, many studies revealed that intervention could not smooth the exchange rate

movement.

Intervention may Decrease Volatility Central bank intervention may reduce exchange rate volatility if it resolves uncertainty by

market participants about future monetary policy. For example, if the market is uncertain

about the stance of monetary policy, then intervention to halt a drop in the dollar may signal

that the Federal Reserve is committed to a tight monetary policy. The resolution of

uncertainty about future monetary policy may then lead to less exchange rate volatility.

Central bank intervention may also reduce exchange rate volatility by reducing the likelihood

of a speculative bandwagon. Suppose the dollar exchange rate falls from

￥120/$ to ￥115/$. As speculators see the dollar falling, they may jump on the bandwagon

thinking the dollar may fall further to ￥110/$. Under this scenario, speculators who sell $1

million at ￥115/$ could make a profit if the dollar falls to

￥110/$ and they reacquired dollars at the lower value. However, if the central bank

intervenes at ￥115/$ and pushes the dollar back to ￥120/$, then speculators could suffer a

loss. Speculators may therefore become reluctant to push the dollar down too rapidly if they

believe the central bank will intervene to prevent the dollar from falling. By reducing selling

pressure when the dollar starts to fall, central bank intervention could reduce speculative

bandwagons and thereby reduce volatility.

Intervention may Increase Volatility Central bank intervention could actually increase exchange rate volatility if intervention

increases private sector uncertainty about central bank policies. Suppose the central bank

surprises traders by intervening to increase the value of the dollar but announces neither the

intervention's magnitude nor its motivation. In making their trades, foreign exchange traders

have to guess the meaning of the intervention and attempt to infer the implications of the

action for future policy. Because their trades are based on incomplete information, traders

will need to revise their currency positions once more information about intervention policy

becomes available. These changes in currency positions imply changes in the exchange rate

and hence greater exchange rate volatility.

Market uncertainty about the likelihood of future central bank intervention could also lead to

greater exchange rate volatility. Because central banks do not announce their plans for

intervention, foreign exchange traders must base their currency positions on their best

guesses of whether and when central banks will intervene. These currency positions and

hence exchange rates will change over time as traders reassess the likelihood of central bank

intervention. Uncertainty over central bank intervention policy can contribute to exchange

rate volatility.

Central bank intervention can also increase exchange rate volatility by increasing the

likelihood of speculative bandwagons. For instance, intervention might increase volatility if

market participants think the central bank is unable or unwilling to prevent speculative forces

from pushing the exchange rate in a particular direction. Suppose the dollar exchange rate

falls from ￥120/$ to ￥115/$ and that speculators expect the dollar to fall further to ￥110/$.

As before, a speculator selling the dollar at ￥115/$ might expect to realize a profit if the

dollar falls to ￥110/$. The expected profit opportunity encourages other speculators to jump

on the bandwagon, thereby actually pushing down the dollar. Since the traders are uncertain

about the intervention policy. The uncertainty about intervention policy may encourage

speculation and cause price changes and exchange rate volatility to be higher than in the

absence of such intervention.

However, there is still much evidence that interventions are effective in stabilizing the market

and influencing the exchange rate if the interventions are:

1. Large in amount - The larger the amount of interventions, the greater the possibility

of success. 2. Coordinated - Evidence suggests that coordinated intervention is more effective than

the individual intervention. It is because where the monetary authorities for both the

undervalued and overvalued currencies participate; the coordinated signals offered

by the intervention may view as more credible. 3. In series - spread out the intervention transaction over a number of days to maximize

the effects of intervention through the signaling channel. The intervention stance

may be perceived to be more credible to market participants if they see a series of

intervention transaction rather a one-off entry into market. Publicized - reported

interventions are the most effective central bank action because it is regarded as a

credible source of information about the future monetary policy while secret

interventions have little effect on exchange rate. 4. Publicized - reported interventions are the most effective central bank action

because it is regarded as a credible source of information about the future monetary

policy while secret interventions have little effect on exchange rate.

Draft Guidelines for Foreign Exchange Reserve Management

Although each country is free to manage its foreign reserve, management of foreign

exchange reserves is important because reserves are a key determinant of a country's ability

to avoid economic and financial crisis. Therefore, since 2000 the IMF - in collaboration with

the Bank for International Settlements (BIS), World Bank, and many member countries - has

been engaged in the development of a set of Draft Guidelines for Foreign Exchange Reserve

Management. For further information, we can approach to the IMF site

http://www.imf.org/external/np/mae/ferm/eng/

Keywords: Central Bank Intervention, Foreign exchange

intervention, Exchange Rate

Links

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Bank of Mauritius - Home Page

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5300 visits has been made through our site.

Czech Republic (Czech National Bank)

URL: http://www.cnb.cz/en/index.html

With Czech and English version.


Bank of Finland

URL: http://www.bof.fi/env/startpge.htm

The Bank of Finland is Finland's central bank and a member of the

European System of Central Banks (ESCB). In this site, you can find

Finland statistics, the bank's publications and links to other European

banks or related sites. This site is with English version.


Argentina (Banco Central de la Replica Argentina)

URL: http://www.bcra.gov.ar/

http://intl.econ.cuhk.edu.hk/topic/index.php?did=9#link_123




http://intl.econ.cuhk.edu.hk/links/show.php?cid=123

http://intl.econ.cuhk.edu.hk/topic/go.php?lid=124




With Spanish and English version.


The Freezing of Assests Imposed by the Brazilian Central Bank in Cases of Intervention and Extrajudicial Liquidation - Subjective Limits

URL: http://www.levysalomao.com.br/LRMar97b.htm

"The Freezing of Assests Imposed by the Brazilian Central Bank in

Cases of Intervention and Extrajudicial Liquidation - Subjective Limits"

tries to identify whether it is legal for the Brazilian Central Bank,

pursuant to Law nº 6.024, dated March 13, 1974, to freeze the assets

of persons connected to financial institutions that are undergoing

intervention or extrajudicial liquidation. This passage is written in

March/April 1997.


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Czech Republic (Czech National Bank)

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Argentina (Ministry of Economy and Public Works and Services)

URL: http://www.mecon.ar/default.htm

With Spanish and English version. In the site, there are data bases link

to documentation and information center and legislative information

department. You can also find economic news of Argentina and access

to different organizations of Argentina.


Tokyo Stock Exchange

URL: http://www.tse.or.jp/eindex.html

With Japanese and English version.


Central Bank of the Republic of Turkey)

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Central Bank of Turkey, With Turkish and English version.


To Dollarize or not to Dollarize: Currency Choices for the Western Hemisphere

URL: http://www.nsi-ins.ca/ensi/events/final.html

This paper was written by Roy Culpeper. The paper is divided into 4

parts: 1. Exchange Rate Policy Options 2. The Emergence of

Dollarization as a Policy Option 3. Exchange Rate Regimes, Sovereignty

and Politics 4. Areas of Agreement, Disagreement, and Issues for

Further Research Paper is published in HTML format.









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International Financial Encyclopaedia

URL: http://www.euro.net/innovation/Finance_Base/Fin_encyc.html

It's an interactive Financial Encyclopaedia which is the courtesy of

Investor's Galleria. It presents very brief entries which help if no other

source of information is available. This dictionary includes a number of

Standard terms which are accepted by a major standards setting body

such as the International Standards Organisation.


Foreign Currency Notes Exchange Rates

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This website is the courtesy of Bank of East Asia, it provides Foreign

Currency Notes Exchange Rates of the main countries all over the

world.


Economagic: Economic Time Series Page

URL: http://www.EconoMagic.com/

This website is made by Ted Bos of University of Alabama, at

Birmingham. This page is meant to be a comprehensive site of free,

easily available economic time series data useful for economic

research, in particular economic forecasting. This site (set of web

pages) was started in 1996 to help students in an Applied Forecasting

class. The idea was to give students easy access to large amounts of

data, and to be able to quickly get charts of that data. There are more

than 100,000 time series for which data and custom charts can be

retrieved. Though the greatest utility of this site is the vast number of

economic time series, and the easily modified charts of that same data,

an overlooked facility of great utility is the availability of Excel files for

all series. The majority of the data is USA data. The core data sets

involve US macroeconomic data (that is, for the whole US), but the

bulk of the data is employment data by local area -- state, county,

MSA, and many cities and towns. A subscription allows a user to use

the on-site programs that provide mechanical forecasts for any time

series. These time series can be those freely available on this site, any

series that the user pastes to the download area, or any series that the

user has negotiated with Economagic to provide or maintain. The price

of an annual subscription is US$200, or US$120 for six months.


Bloomberg.com : Currency Rates

URL: http://www.bloomberg.com/markets/currency.html

Bloomberg's Currency Calculator is used for searching for the foreign

exchange rate. Bloomberg.com offers you the ability to determine the

rate of exchange between any two world currencies, spot rates of the

top 11 countries, regional currency rates, and a quick listing of

currencies in alphabetical order.







Global Financial Data Home Page

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This impressive collection of historical global financial data stretches

from the years 1264 to 2000. While most of the actual data must be

purchased, this Website does offer several free series, including Stock

Markets since 1693, Interest Rates since 1700, and Inflation Rates

since 1264. The site also contains a decent-sized collection of research

papers written about the Eurodollar and a links page with financial

Websites from around the world. Subscriptions to the database are

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References

References related to Central Bank Intervention (8 references are shown.)

Intraday Technical Trading in the Foreign Exchange Market

Author: hristopher J. Neely and Paul A. Weller

Book:

Year: January 2001

It is provided by the Federal Reserve Bank of St. Lois. This paper

examines the out-of-sample performance of intraday technical trading

strategies selected using two methodologies, a genetic program and an

optimized linear forecasting model. When realistic transaction costs

and trading hours are taken into account, we find no evidence of

excess returns to the trading rules derived with either methodology.

Thus, our results are consistent with market efficiency. We do,

however, find that the trading rules discover some remarkably stable

patterns in the data.

Remarks: This paper is downloaded at:

http://www.stls.frb.org/docs/research/wp/99-016B.pdf

Technical Analysis and Central Bank Intervention

Author: Christopher Neely and Paul Weller

Book:

Year: Feburary 2000

This paper extends the genetic programming techniques developed in

Neely, Weller and Dittmar (1997) to provide some evidence that

information about U.S. foreign exchange intervention can improve

technical trading rules?profitability for two of four exchange rates over

part of the out-of-sample period. Rules tend to take positions contrary

to official intervention and are unusually profitable on days prior to

intervention, indicating that intervention is intended to check or

reverse predictable trends. Intervention seems to be more successful

in checking predictable trends in the out-of-sample (1981-1998) period

than in the in-sample (1975-1980) period. We conjecture that

instability in the intervention process prevents more consistent

improvement in the excess returns to rules. We find that the

improvement in performance results from more precise estimation of

the information in the past exchange rate series, rather than from

information about contemporaneous intervention.

Remarks: This paper is downloadable at:

http://www.stls.frb.org/docs/research/wp/97-002c.pdf


Foreign Exchange Market Trading Volume and Federal Reserve Intervention

Author: Alain Chaboud, Federal Reserve, Board of Governors

Book:

Year: July 1999

The authors find a large positive correlation between daily trading

volume in currency futures markets and foreign exchange intervention

by the Federal Reserve over the period 1979-1996. Neither

contemporaneous nor predicted volatility can fully account for the

increases in trading activity. Whether or not the intervention operation

is publicly reported appears to be an important determinant of trading

volume.


http://www.unet.brandeis.edu/~blebaron/wps/volpap.pdf

Fed Intervention, Dollar Appreciation, and Systematic Risk

Author: Richard J. Sweeney

Book:

Year: August 2000

This paper is the first to investigate intervention effects in asset pricing

models that relate appreciation to risk-factor realizations. Fed foreign-

currency sales show economically and statistically significant

association with increases in beta risk in the dollar's appreciation rate

and thus with the dollar's ex ante appreciation rate. But intervention’s

ex post effects may be unreliable: they depend on the size of world-

asset-market movements, and the size of intervention’s association

with beta varies importantly from year to year. Even successful

intervention to strengthen the dollar may be costly: By increasing the

dollar’s systematic risk, it makes U.S. investments less attractive

relative to foreign investments. Further, uncertainty about the timing

and size of Fed intervention makes it harder for investors to select

appropriate risk-adjusted discount rates and to forecast the dollar value

of cash flows, and thus may induce resource misallocation. This paper’s

results are consistent with both portfolio balance and signaling

channels.

Remarks: The full text is downloadable at:

http://www.msb.georgetown.edu/faculty/sweeneyr/wp/effects.new.inte

rvention.pdf

Does Central Bank Intervention Stabilize Foreign Exchange Rates?

Author: Catherine Bonser-Neal

Book: Federal Reserve Bank of Kansas City

Year:

This paper is written by Catherine Bonser-Neal. It's about the

exchange rate volatility, its causes and its consequence, how it

measures, how central bank intervention affects the volatility, etc.

Remarks: The paper is downloadable at:

http://www.kc.frb.org/publicat/econrev/pdf/1q96bons.pdf

The Market Microstructure of Central Bank Intervention

Author: Kathryn M. Dominguez

Book: NBER Working Paper Series No. 7337

Year: September 1999

One of the great unknowns in international finance is the process by

which new information influences exchange rate behavior. This paper

focuses on one important source of information to the foreign

exchange markets, the intervention operations of the G-3 central

banks. Previous studies using daily and weekly foreign exchange rate

data suggest that central bank intervention operations can influence

both the level and variance of exchange rates, but little is known about

how exactly traders learn of these operations and whether intra-daily

market conditions influence the effectiveness of central bank

interventions. This paper uses high-frequency data to examine the

relationship between the efficacy of intervention operations and the

"state of the market" at the moment that the operation is made public

to traders. The results indicate that some traders know that a central

bank is intervening at least one hour prior to the public release of the

information in newswire reports. Also, the evidence suggests that the

timing of intervention operations matter – interventions that occur

during heavy trading volume and that are closely timed to scheduled

macro announcements are the most likely to have large effects. Finally,

post-intervention mean reversion in both exchange rate returns and

volatility indicate that dealer inventories are affected by market

reactions to intervention news.


http://papers.nber.org/papers/W7337.pdf

Further evidence on technical analysis and profitability of foreign exchange intervention

Author: Simón Sosvilla-Rivero, Julián Andrada-Félix and Fernando

Fernández-Rodríguez

Book:

Year: 1999

In this paper the authors present new evidence on the positive

correlation Between returns from technical trading rules and periods of

central bank intervention. To that end, they evaluate the profitability of

a trading strategy based on nearest-neighbour (nonlinear) predictors,

which may be viewed as a generalisation of graphical methods widely

used in financial markets. The authors use daily data on the US

Dollar/Deutsche mark and US Dollar/Japanese Yen covering the 1

February 1982-31 December 1996 period. The results suggest that the

exclusion of days of US intervention implies a substantial reduction in

all profitability indicators (net returns, ideal profit measure, Sharpe

ratio and directional forecast), being the reduction grater in the US

Dollar-Deustchmark case than in the US Dollar-Japanese yen case.

Remarks: The text is downloadable at:

ftp://ftp.fedea.es/pub/Papers/1999/DT99-01.pdf

Smoke and Mirrors in the Foreign Exchange Market

Author: Willem H. Buiter and Anne C. Sibert

Book:

Year:

The plight of manufacturing has focussed attention on the sterling’s

persistent strength. The MPC recognises the problem, but argues there

is little it can do. It is mandated to pursue the government’s inflation

target. Only subject to this target being met, can other objectives be

pursued. This leaves little scope for reining in the pound; the short-

term interest rate the MPC uses as its instrument cannot be used to

achieve both inflation and exchange rate goals. The authors claim that

there are additional monetary and financial policy tools available.


http://www.nber.org/~wbuiter/observer.pdf

References related to Foreign exchange intervention (26 references are shown.)

Does Foreign Exchange Intervention Work?

Author: Kathryn M. Dominguez and Jeffrey A. Frankel

Book: Book Title: Does Foreign Exchange Intervention Work?


Following the Versailles G-7 summit of 1982, most government officials

and academic analysts downplayed the potential impact of exchange

market intervention unless such intervention was permitted to affect

national monetary policies. This study challenges the conventional

wisdom. Using previously unavailable data on daily intervention by the

US Federal Reserve and the German Bundesbank, the authors find to

the contrary that even "sterilized" intervention can have an effect,

especially if it is known to the markets. Implications are drawn for

intervention policy and its role in the international coordination

process.

Remarks:

An Intraday Analysis of the Effectiveness of Foreign Exchange Intervention

Author: Neil Beattie and Jean-François Fillion

Book:

Year: February 1999

This paper assesses the effectiveness of Canada's official foreign

exchange intervention in moderating intraday volatility of the

Can$/US$ exchange rate, using a 2-1/2-year sample of 10-minute

exchange rate data. The use of high frequency data (higher than daily

frequency) should help in assessing the impact of intervention since

the foreign exchange market is efficient and reacts rapidly to new

information. The estimated equations explain volatility in terms of four

major factors: intraday seasonal pattern; daily volatility persistence;

macroeconomic news announcements; and the impact of central bank

intervention. Rule-based (or expected) intervention apparently had no

direct impact on the reduction of foreign exchange volatility, although

the existence of a non-intervention band seemed to provide a small

stabilizing influence. This result is interpreted to mean that the

stabilizing effect of expected intervention came into play as the

Canadian dollar approached the upper or lower limits of the band.

When the dollar exceeded the band, actual intervention did not have

any direct impact because it was expected. Moreover, the results show

that discretionary (or unexpected) intervention might have been

effective in stabilizing the Canadian dollar, although the impact of an

intervention sequence diminished as it increased beyond a few days.

Remarks: The paper can be downloaded in PDF format at:

http://www.bankofcanada.ca/publications/working.papers/1999/wp99-

4.pdf

Measuring the Profitability and Effectiveness of Foreign Exchange Market Intervention: Some Canadian Evidence

Author: John Murray, Mark Zelmer, and Shane Williamson

Book: Technical Report No. 53

Year: March 1990

When the major industrial countries decided to move to a system of

managed flexible exchange rates following the collapse of the Bretton

Woods system, many observers thought that this would reduce, if not

eliminate, the need for official foreign exchange market intervention.

During the past fifteen years, however, intervention in most countries,

including Canada, has risen steadily in both frequency and intensity.

This paper presents new empirical evidence on the profitability and

effectiveness of Canadian intervention from 1975 to 1988. The results

suggest that the government's foreign exchange operations have been

very profitable and have tended to be stabilizing, in the sense that

authorities were typically pushing the exchange rate towards its long-

run trend and helping to reduce short-run volatility in the market.

Remarks: We can order printed copies of this paper at no charge

from: Publications Distribution, Bank of Canada 234 Wellington Street,

Ottawa, Canada K1A 0G9 E-mail: publications@bank-banque-

canada.ca Telephone: 613-782-8248 Fax: 613-782-8874

Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?

Author: Lucio Sarno and Mark P Taylor

Book:

Year: February 2001

This paper is provided by Centre for Economic Policy Research. In this

Paper we assess the progress made by the profession in understanding

whether and how exchange rate intervention works. To this end, we

review the theory and evidence on official intervention, concentrating

primarily on work published within the last decade or so. Our reading

of the recent literature leads us to conclude that, in contrast with the

profession's consensus view of the 1980s, official intervention can be

effective, especially through its role as a signal of policy intentions, and

especially when it is publicly announced and concerted. We also note,

however, an apparent empirical puzzle concerning the secrecy of much

intervention and suggest an additional way in which intervention may

be effective but which has so far received little attention in the

literature, namely through its role in remedying a coordination failure

in the foreign exchange market.

Remarks: The full text can be downloaded at

http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=2690

Foreign Exchange Intervention, Policy Objectives and Macroeconomic Stability

Author: Paolo Vitale

Book:

Year: July 2001

Within a simple model of monetary policy for an open economy, it

studies how foreign exchange intervention may be used to condition

agents' beliefs of the objectives of the policymakers. Differently from

cheap talk foreign exchange intervention guarantees a unique

equilibrium. Foreign exchange intervention does not bring about a

systematic policy gain, such as an increase in employment or a

reduction in the inflationary bias. It can, however, stabilise the national

economy, for it drastically reduces the fluctuations of employment and

output. Foreign exchange intervention is profitable, but a trade-off

exists between these profits and the stability gain it brings about.

Finally, an important normative conclusion of our analysis is that

foreign exchange intervention and monetary policy should be kept

separated, in that a larger stability gain is obtained when these two

instruments of policy making are under the control of different

governmental agencies.

Remarks: The full text is downloadable at

http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=2886

The Practice of Central Bank Intervention: Looking Under the Hood

Author: Christopher J. Neely

Book:

Year: October 2000

This article first reviews methods of foreign exchange intervention and

such intervention. Types of intervention, instruments, timing, amounts,

motivation, secrecy and perceptions of efficacy are discussed.

Remarks: The paper can be downloaded at:

http://www.stls.frb.org/docs/research/wp/2000-028.pdf

The Temporal Pattern of Trading Rule Returns and Central Bank Intervention: Intervention Does Not Generate Technical Trading Rule Profits


Book:

Year: November 2000

It is provided by the Federal Reserve Bank of St. Louis. This paper

characterizes the temporal pattern of trading rule returns and official

intervention for Australian, German, Swiss and U.S. data to investigate

whether intervention generates technical trading rule profits. High

frequency data show that abnormally high trading rule returns precede

German, Swiss and U.S. intervention, disproving the hypothesis that

intervention generates inefficiencies from which technical rules profit.

Australian intervention precedes high trading rule returns, but

trading/intervention patterns make it implausible that intervention

actually generates those returns. Rather, intervention responds to

exchange rate trends from which trading rules have recently profited.


http://www.stls.frb.org/docs/research/wp/2000-018C.pdf



Book:

Year: January 2001












Is Technical Analysis in the Foreign Exchange Market Profitable? A Genetic Programming Approach

Author: Christopher Neely, Paul Weller and Robert Dittmar

Book:

Year: August 1997

Using genetic programming techniques to find technical trading rules,

the authors find strong evidence of economically significant out-of-

sample excess returns to those rules for each of six exchange rates

($/DM, $/¥, $/SF, $/£, ¥/DM, SF/£), over the period 1981-1995.

Further, then the $/DM rules were allowed to determine trades in the

other markets, there was a significant improvement in performance in

all cases except for the ¥/DM. Betas calculated for the returns

according to four international benchmark portfolios provide no

evidence that the returns to these rules are compensation for bearing

systematic risk. Bootstrapping results on the $/DM indicate that the

trading rules are detecting patterns in the data that are not captured

by standard statistical models.



Foreign Exchange Market Trading Volume and Federal Reserve Intervention

Author: Alain Chaboud, Federal Reserve, Board of Governors

Book:

Year: July 1999

The authors find a large positive correlation between daily trading

volume in currency futures markets and foreign exchange intervention

by the Federal Reserve over the period 1979-1996. Neither

contemporaneous nor predicted volatility can fully account for the

increases in trading activity. Whether or not the intervention operation

is publicly reported appears to be an important determinant of trading

volume.


http://www.unet.brandeis.edu/~blebaron/wps/volpap.pdf

The Determinants of Foreign Exchange Intervention by Central Banks: Evidence from Australia

Author: Suk-Joong Kim and Jeffrey Sheen

Book:

Year: December 1999

This paper is a working series of the University of New South Wales.

Intervention by the Reserve Bank of Australia on foreign exchange

markets from 1983 to 1997 is conjectured to have been determined by

exchange rate trend correction, exchange rate volatility smoothing and

profitability considerations. Using Probit and friction models, we show

that these factors were significant influences on intervention

behaviour. Consistent with the constraint of intervening only when a

clear trend is apparent, we find that above average measures of

deviations from trend and of volatility muted the response of the

Reserve Bank.


http://banking.web.unsw.edu.au/workpap/wp1_00.pdf

Are changes in foreign exchange reserves well correlated with official intervention?


Book: Review - Federal Reserve Bank of St. Louis

Year: Sept/Oct 2000 Vol: Vol. 82, Iss. 5; pg. 17, 15 pgs

This review is writtne by Christopher J. Neely, a senior economist at

the Federal Reserve Bank of St. Louis. It's about why countries hold

international reserves, correlations between Central Bank intervention

and changes in reserves.

Remarks: This article is downloadable at:

http://www.stls.frb.org/docs/publications/review/00/09/0009cn.pdf

Why intervention rarely works?

Author: Owen F Humpage and William P Osterberg

Book: Federal Reserve Bank of Cleveland. Economic Commentary;

Cleveland;

Year: Feb 2000 Vol: pg. 1, 4 pgs

In the late 1980s, the US frequently intervened in the foreign-exchange

market. Unconvinced of the effectiveness of such operations and

worried about possible conflicts with monetary policy, the US curtailed

its interventions during the early part of the last decade. Calls for action

are being heard again, however. Most economists now regard foreign-

exchange-market intervention as generally ineffectual. Intervention

cannot systematically affect a nation's exchange rates when undertaken

independent of its monetary policy, and when undertaken as a goal of

monetary policy, exchange rate-management can compromise price

stability and create confusion about long-term policy objectives. Central

banks cannot regularly influence day-to-day exchange-rate movements

through sterilized intervention because they do not customarily possess

an information advantage over private-sector traders.


http://global.umi.com/pqdweb?Did=000000052108260&Fmt=4&Deli=1

&Mtd=1&Idx=45&Sid=1&RQT=309

Is intervention a signal of future monetary policy? Evidence from the federal funds futures market

Author: Rasmus Fatum and Michael Hutchison;

Book: Journal of Money, Credit, and Banking; Columbus;

Year: Feb 1999 Vol: Vol. 31, Iss. 1; pg. 54, 16 pgs

Sterilized foreign exchange market intervention may affect the

exchange rate if it signals future monetary actions. Signaling will be

effective if the central bank backs up intervention with predictable

changes in the stance of monetary policy and, in turn, affects current

expectations. This paper investigates whether intervention operations in

the US are related to changes in expectations over the stance of future

monetary policy, where expectations are proxied by federal funds

futures rates. This relatively new futures market instrument has proved

to be an efficient and unbiased predictor of the future spot federal

funds rate. Estimates obtained from a GARCH time-series model over

the 1989-1993 period using daily data do not support the signaling

hypothesis.



&Mtd=1&Idx=77&Sid=1&RQT=309

On the effectiveness of sterilized foreign exchange intervention

Author: Rasmus Fatum

Book: ECB Working Paper No. 10

Year: February 2000

This paper addresses the question of whether sterilized Central Bank

intervention systematically affect exchange rates. Furthermore, the

paper analyze whether the central bank can conduct its intervention

operations in a specific manner, in order to increase the likelihood of

achieving its objectives.

Remarks:

Fed Intervention, Dollar Appreciation, and Systematic Risk

Author: Richard J. Sweeney

Book:

Year: August 2000

This paper is the first to investigate intervention effects in asset pricing

models that relate appreciation to risk-factor realizations. Fed foreign-

currency sales show economically and statistically significant

association with increases in beta risk in the dollar's appreciation rate

and thus with the dollar's ex ante appreciation rate. But intervention’s

ex post effects may be unreliable: they depend on the size of world-

asset-market movements, and the size of intervention’s association

with beta varies importantly from year to year. Even successful

intervention to strengthen the dollar may be costly: By increasing the

dollar’s systematic risk, it makes U.S. investments less attractive

relative to foreign investments. Further, uncertainty about the timing

and size of Fed intervention makes it harder for investors to select

appropriate risk-adjusted discount rates and to forecast the dollar value

of cash flows, and thus may induce resource misallocation. This paper’s

results are consistent with both portfolio balance and signaling

channels.


http://www.msb.georgetown.edu/faculty/sweeneyr/wp/effects.new.inte

rvention.pdf

The Foreign-Exchange Costs of Central Bank Intervention: Evidence from Sweden

Author: Boo Sjöö and Richard J. Sweeney

Book:


This study presents evidence on risk-adjusted profits for the Swedish

central bank. Estimated profits can be quite sensitive as to whether

rates of return are risk-adjusted or not, and how the risk-adjustment is

done. Various ways of adjusting for abnormal returns, and extracting

buy-sell signals, are tried. Results, on daily data, support the view that

Riksbank intervention did not make risk-adjusted losses over the

period 1986-1990. The results might be challenged as arising from

inappropriate risk adjustment.


http://www.msb.georgetown.edu/faculty/sweeneyr/wp/JIMFPA44.pdf

Is Sterilized Foreign Exchange Intervention Effective After All? An Event Study Approach

Author: Rasmus Fatum and Michael Hutchison

Book:

Year: February 1999

Central banks actively engage in sterilized foreign exchange market

intervention despite numerous empirical studies indicating that these

operations do not systematically affect the exchange rate. Are these

policies misguided and central bankers irrational? Or is evidence

showing the effectiveness of sterilized intervention being overlooked?

This paper argues the latter, providing evidence on the effectiveness of

sterilized intervention using an event study approach linking

intervention with systematic exchange rate changes. We argue that

this is an important methodological innovation since studies using

time-series techniques are limited by the nature of the data: intense

and sporadic bursts of intervention activity juxtaposed against

exchange rates that change almost continuously on a daily basis. The

event study framework used in standard finance studies, by contrast, is

ideally suited to this circumstance. Focusing on daily US official

intervention operations, we identify separate intervention “episodes”

and analyze the subsequent effect on the exchange rate. Using the

matched-sample mean test and the nonparametric sign test of the

median, we find strong evidence that sterilized intervention

systemically affects the exchange rate. These results are especially

strong when episodes are distinguished by the intervention currency,

the form of intervention (sales or purchases of foreign exchange), and

exchange rate developments immediately prior to the intervention

activity.

Remarks: The paper can be downloaded from:

http://www.econ.ku.dk/epru/files/wp/wp9909.pdf

Foreign Exchange Intervention for Internal Balance

Author: Kyung Soo Kim

Book: International Economic Journal

Year: 2000 Vol: Volume 14, Number 4, Winter 2000

This paper is concerned with the optimal combination of sterilization

and wage indexation in a small open economy subject to various

disturbances. In most cases the effects of these policy instruments are

interdependent such that they act like a single instrument. At the

optimum, in addition to the well-known substitutability of foreign

exchange intervention and wage indexation, the complementarity of

foreign exchange intervention and sterilization is obtained. The

relationship between the degree of capital mobility and the optimal

combination of the policy instruments is also examined.


http://gias.snu.ac.kr/wthong/IEJ/00winter/00-W3.PDF

Sterilized Central Bank Intervention in the Foreign Exchange Market

Author: Paolo Vitale

Book:

Year: Feb 1997

In this paper we study the signalling role of sterilised central bank

intervention. Through a market micro-structure framework, we show

that in some circumstances sterilised intervention may represent an

independent tool of policy and an instrument to influence exchange

rates. Central bank intervention in the foreign exchange market also

has important effects on the efficiency and liquidity of the market, the

volume of trading and the conditional volatility of the exchange rate.

Our results also question the general opinion that visible intervention

should be preferred to secret one.


http://fmg.lse.ac.uk/download/fmgdps/dp0259.pdf

Treasury and Federal Reserve Foreign Exchange Operations

Author: Kos,-Dino and Schwarz,-Krista

Book: Federal-Reserve-Bulletin

Year: June 2001 Vol: 87(6), pages 394-99.

During the first quarter of 2001, the dollar appreciated 7.3 percent

against the euro and 10.3 percent against the yen in an atmosphere of

increased market uncertainty about the extent and duration of global

economic slowing. On a trade-weighted basis, the dollar ended the

quarter 7.4 percent stronger against an index of major currencies. The

U.S. monetary authorities did not intervene in the foreign exchange

markets during the quarter.


http://www.federalreserve.gov/pubs/bulletin/2001/0601forex.pdf

The Rise and Fall of Foreign Exchange Market Intervention as a Policy Tool

Author: Schwartz,-Anna-J.

Book: Journal-of-Financial-Services-Research

Year: December 2000 Vol: 18(2-3), December 2000, pages 319-39..

The premise of the paper is that the fervor for foreign exchange

market intervention by U.S., and European monetary authorities has

ebbed in recent years. A pattern of initial belief in the effectiveness of

foreign exchange market intervention has recently been eroded, as is

revealed by the absence of intervention in circumstances that in earlier

times would have invoked it. Only the Bank of Japan among central

banks of the developed world has not thus far abandoned its faith that

intervention can change the relative value of the yen as determined by

market forces to conform with its notion of what that value should be.

To explain why U.S. and European monetary authorities no longer

believe that intervention is a tool that works, the author reviews the

equivocal record of past episodes, the inconclusive results of empirical

research, and the problems of implementation that intervention

advocates ignore.

Remarks:

Government Intervention and Adverse Selection Costs in Foreign Exchange Markets

Author: Naranjo, Andy and Nimalendran, M.

Book: Review-of-Financial-Studies; 13(2), Summer 2000, pages 453-

77.

Year: Summer 2000

An important group of traders in the foreign exchange market is

governments who often adhere to a foreign exchange rate policy of

occasional interventions with otherwise floating rates. In this article we

provide a theoretical model and empirical evidence that government

foreign exchange interventions create significant adverse selection

problems for dealers. In particular, our model shows that the adverse

selection component of the foreign exchange spread is positively

related to the variance of unexpected intervention and that expected

intervention has no impact on the spread. After controlling for

inventory and order processing costs, we find that bid-ask spreads

increase with U.S. dollar and German deutsche mark foreign exchange

rate intervention during the period 1976-94. Furthermore, when the

intervention is decomposed into expected and unexpected components,

we find a statistically and economically significant increase in spreads

with the variance of unexpected intervention, while expected

intervention has no significant impact on spreads.

Remarks: The text is found in EconLit. It can be found after clicking

'check for CUHK holdings'



Book:

Year:











iMarket Microstructure Effects of Government Intervention n the Foreign Exchange Market

Author: Peter Bossaerts and Pierre Hillion

Book: Review of Financial Studies

Year: 1991 Vol: vol. 4, issue 3, pages 513-41

An asymmetric information model of the bid-ask spread is developed

for a foreign exchange market subject to occasional government

interventions. Traditional tests of the unbiasedness of the forward rate

as a predictor of the future spot rate are shown to be inconsistent

when the rates are measured as the average of their respective bid

and ask quotes. Larger bid-ask spreads on Fridays are documented.

Reliable evidence of asymmetric bid-ask spreads for all days of the

week, albeit more pronounced on Fridays, are presented. The null

hypothesis that the forward rate is an unbiased predictor of the future

spot rate continues to be rejected. The regression slope coefficients

increase toward unity, however, indicating a less variable risk

premium. Article published by Oxford University Press on behalf of the

Society for Financial Studies in its journal, The Review of Financial

Studies.

Remarks: Order is required.

Should the European Central Bank Intervene in the Foreign Exchange Market?

Author: Prof. Dr. Sylvester C.W. Eijffinger (CentER, Tilburg University

and CEPR)

Book:

Year: November 2000

After the co-ordinated intervention of the G7 countries on 22

September 2000, the European (System of) Central Bank(s) decided to

intervene unilaterally in the foreign exchange markets on 3 and 6

November 2000. The European Central Bank intervened in the foreign

exchange market “…owing to its concern about the global and domestic

repercussions of the exchange rate of the euro, including its impact on

price stability” The European Central Bank confirmed then its view that

the external value of the euro did not reflect the favourable conditions

of the euro area. The consequences of these foreign exchange

interventions were negligible for the euro-dollar exchange rate. One

could ask the question: should the European Central Bank intervene in

the foreign exchange market, in particular on its own? In other words,

what is the effectiveness of co-ordinated and unilateral foreign

exchange intervention by a central bank? In order to answer this

question, the authors have to analyse the various transmission

channels of foreign exchange intervention both in theory and practice.

Remarks: The paper in pdf format is downloadable at:

http://www.europarl.eu.int/comparl/econ/pdf/emu/speeches/20001123

/eijfinger/default_en.pdf

References related to Exchange Rate (51 references are shown.)

China's exchange rate policy

Author: Xu, Yingfeng

Book: China Economic Review

Year: 2000 Vol: Vol. 11

Should or will the yuan depreciate? This is an important question

widely speculated in world financial markets and intensively debated in

China in the wake of the East Asian financial crisis in 1997. The present

paper examines in detail the fundamentals that determine the

exchange rate in China and concludes with two important findings. One

is that the past two decades of economic reform has made domestic

prices in China sufficiently market-determined and linked to world

prices so that the exchange rate can serve as an effective nominal

anchor. Exchange rate stability leads to domestic price stability. The

other result is that because of the flexibility of domestic prices, a

change in the exchange rate has only a modest and ephemeral effect

on the terms of trade and trade flows. Therefore, exchange rate

flexibility is not essential to keep the current account in balance. Such

evidence suggests that China should continue the policy to maintain

exchange rate stability, as it has done since 1994.

Remarks:

Fear of Floating

Author: Guillermo A. Calvo University of Maryland and NBER Carmen

M. Reinhart* University of Maryland and NBER

Book:

Year: September 25, 2000 Vol: 63 pages

In recent years, many countries have suffered severe financial crises,

producing a staggering toll on their economies, particularly in emerging

markets. One view blames fixed exchange rates-- "soft pegs"--for

these meltdowns. Adherents to that view advise countries to allow their

currency to float. They analyze the behavior of exchange rates,

reserves, the monetary aggregates, interest rates, and commodity

prices across 154 exchange rate arrangements to assess whether

"official labels" provide an adequate representation of actual country

practice. We find that, countries that say they allow their exchange

rate to float mostly do not--there seems to be an epidemic case of

"fear of floating". Since countries that are classified as having a free or

a managed float mostly resemble noncredible pegs--the so-called

"demise of fixed exchange rates" is a myth--the fear of floating is

pervasive, even among some of the developed countries. They present

an analytical framework that helps to understand why there is fear of

floating.

Remarks: Paper can be downloaded in

http://www.bsos.umd.edu/econ/ciecrp11.pdf

Fixed vs. Flexible Exchange Rates. Preliminaries of a Turn-of-Millennium Rematch

Author: Guillermo A. Calvo - University of Maryland

Book:

Year: May 16, 1999 Vol: 17 pages

This note examines the pros and cons of flexible and fixed exchange

rates in terms of a bear-bones model which, however, takes into

account features that have played a prominent role in recent currency

crises, namely, volatility of capital flows and the real exchange rate,

currency substitution and financial fragility, and the Credit Channel.

Remarks: The paper is downloadable at

http://www.bsos.umd.edu/econ/ciecrp10.pdf

Exchange Rate Regimes and Institutional Arrangements in the Shadow of Capital Flows

Author: Dani Rodrik

Book:

Year: Sep 2000 Vol: 20 Pages

This paper has been prepared for a conference on Central Banking and

Sustainable Development, held in Kuala Lumpur, Malaysia, August, 28-

30, 2000, in honor of Tun Ismail Mohamed Ali. It talks about the Choice

of exchange rate regimes. The conventional wisdom today is that

countries need to choose between two corners: either floating

exchange rates or irrevocably fixed rates. The reason is the potential of

capital flows to wreak havoc with any intermediate regime (“soft

pegs”). So much of the debate on exchange rate policy focuses on the

pros and cons of currency boards/dollarization versus floats. The

trouble with this debate is that the evidence shows clearly that neither

corner works very well for developing countries for long periods of

time. Countries that have done well in the postwar period in terms of

economic performance have in almost all cases had intermediate

exchange rate regimes. Then he discussed 1) Why floating is not a

solution; 2) Why currency boards or dollarization are not a solution

Remarks: This paper can be downloaded in

http://ksghome.harvard.edu/~.drodrik.academic.ksg/Malaysia%20conf

erence%20paper.PDF

International Financial Crises and Flexible Exchange Rates: Some Policy Lessons from Canada

Author: John Murray, Mark Zelmer and Zahir Antia

Book: Technical Report

Year: April 2000 Vol: No. 88

This paper examines the behaviour of the Canadian dollar from 1997 to

1999 to see if there is any evidence of excess volatility or significant

overshooting. A small econometric model of the exchange rate, based

on market fundamentals, is presented and used to make tentative

judgments about the extent to which the currency might have been

systematically over- or undervalued. Three major conclusions emerge

from the analysis. First, movements in world commodity prices and

Canada-U.S. interest rate differentials can account for most of the

observed variation in the value of the Canadian dollar. Any deviations

that were recorded between actual and predicted values of the

exchange rate were generally small and short-lived, suggesting that

destabilizing speculative behaviour did not play a very important role in

recent market developments. Second, while it is possible to explain

most of the past movements in the Canadian dollar using a simple

exchange rate equation, its ability to predict future movements in the

exchange rate is limited due to the inherent instability of the

fundamental variables guiding its behaviour. Exchange rate

predictions, in short, are only as accurate as the forecasts of future

commodity prices and interest rates. Third, it appears that periods of

market turbulence are often dominated by fundamentalists as opposed

to noise traders and are triggered typically by large external shocks.

Monetary authorities should therefore be wary of resisting any

movements in the exchange rate, since they are often part of a

necessary and unavoidable adjustment process. Aggressive foreign

exchange market intervention and other monetary policy actions

designed to stabilize the exchange rate could easily prove

counterproductive and subvert market efficiency.

Remarks: This paper is accessible at:

http://www.bankofcanada.ca/en/res/tr88-e.htm

The "Exchange Risk Premium," Uncovered Interest Parity, and the Treatment of Exchange Rates in Multicountry Macroeconomic Models

Author: Ralph C. Bryant, Senior Fellow, Economic Studies

Book: Brookings Discussion Papers in International Economics

Year: 1995

The literature on exchange markets conventionally defines the gap

between the forward exchange rate and the expected future spot

exchange rate as an "exchange risk premium." Part I of this paper

skeptically reviews existing interpretations of the exchange risk

premium and then presents an alternative conceptual framework. Part

II revisits the issue of how to model the determination of exchange

rates in empirical macroeconomic models, focusing on the typical use

of the uncovered interest parity condition combined with the

assumption of model-consistent expectations. The paper discusses why

this treatment of exchange rates is inadequate and makes some

suggestions for future research. Part III of the paper replicates some

"standard" regressions, widely reported in the empirical literature,

thought to have a bearing on whether the forward exchange rate is an

unbiased predictor of the future spot rate, whether survey expectations

produce unbiased predictions of actual changes in exchange rates, and

whether a bias in the forward rate can be attributed to a time-varying

risk premium. If the perspective in this paper is accepted, the

conventional statistical literature has devoted excessive resources to

estimation of these standard but not particularly revealing regressions.

All three parts of this paper make use of empirical data on exchange

rate expectations collected since 1985 by the Japan Center for

International Finance.

Remarks: The full version of the paper in PDF format can be

downloaded at: http://www.brook.edu/views/papers/bryant/111.htm

Currency crises and fixed exchange rates in the 1990s: A review

Author: Patrick Osakwe and Lawrence Schembri

Book: Bank of Canada Review article

Year: Autumn 1998

Currency crises in the 1990s, especially those in emerging markets,

have sharply disrupted economic activity, affecting not only the

country experiencing the crisis, but also those with trade, investment,

and geographic links. The authors review the theoretical literature and

empirical evidence regarding these crises. They conclude that their

primary cause is a fixed nominal exchange rate combined with

macroeconomic imbalances, such as current account or fiscal deficits,

that the market perceives as unsustainable at the prevailing real

exchange rate. They also conclude that currency crises can be

prevented through the adoption of sound monetary and fiscal policies,

effective regulation and supervision of the financial sector, and a more

flexible nominal exchange rate.


http://www.bankofcanada.ca/en/res/r984b-ea.htm

International price comparisons based on purchasing power parity

Author: Michelle A. Vachris - Associate professor of economics at

Christopher Newport University James Thomas - enior economist,

Office of Prices and Living Conditions, Bureau of Labor Statistics

Book: Montly Labor Review Online

Year: October 1999 Vol: October 1999, Vol. 122, No. 10

Because exchange rate movements, in general, tend to be more

volatile than changes in national price levels, the purchasing power

parity approach provides the proper basis for comparing living

standards and examining productivity levels over time.

Remarks: The full document can be downloaded at:

http://stats.bls.gov/opub/mlr/1999/10/art1abs.htm

The Failure of Uncovered Interest Parity: Is It Near-Rationality in the Foreign Exchange Market?

Author: David Gruen, Gordon Menzies

Book: Publication of Reserve Bank of Australia

Year: May 1991

A risk-averse US investor adjusts the shares of a portfolio of short-

term nominal domestic and foreign assets to maximise expected utility.

The optimal strategy is to respond immediately to all new information

which arrives weekly. They calculate the expected utility foregone

when the investor abandons the optimal strategy and instead optimises

less frequently. They also consider the cases where the investor

ignores the covariance between returns sourced in different countries,

and where the investor makes unsystematic mistakes when forming

expectations of exchange rate change. They demonstrate that the

expected utility cost of sub-optimal behaviour is generally very small.

Thus, for example, if investors adjust portfolio shares every three

months, they incur an average expected utility loss equivalent to about

0.16 per cent p.a.. It is therefore plausible that slight opportunity costs

of frequent optimisation may outweigh the benefits. This result may

help explain the failure of uncovered interest parity.

Remarks: An electronic version of this paper is not available. If you

want to the printed copy of the paper, you can simply follow the

instruction in this site:

http://www.rba.gov.au/PublicationsAndResearch/RDP/RDP9103.html

Long-Horizon Uncovered Interest Rate Parity

Author: Guy Meredith, Menzie D. Chinn

Book: NBER Working Paper

Year: November 1998 Vol: No. W6797

Uncovered interest parity (UIP) has been almost universally rejected in

studies of exchange rate movements, although there is little consensus

on why it fails. In contrast to previous studies, which have used

relatively short-horizon data, we test UIP using interest rates on

longer-maturity bonds for the G-7 countries. These long-horizon

regressions yield much more support for UIP -- all the coefficients on

interest differentials are of the correct sign, and almost all are closer to

the UIP value of unity than to the zero coefficient implied by the

random walk hypothesis. We then use a small macroeconomic model to

explain the differences between the short- and long-horizon results.

Regressions run on data generated by stochastic simulations replicate

the important regularities in the actual data, including the sharp

differences between short- and long-horizon parameters. In the short

run from risk premium shocks in the face of endogenous monetary

policy. In the long run, in contrast, exchange rate movements are

driven by the "fundamentals," leading to a relationship between

interest rates and exchange rates that is more consistent with UIP.


downloaded at: http://papers.nber.org/papers/W6797

Purchasing Power Parity and Interest Parity in the Laboratory

Author: Eric O™N. Fisher, Department Of Economics, The Ohio State

University

Book:

Year: 10 April 2001

This paper analyzes purchasing power parity and uncovered interest

parity in the laboratory. It finds strong evidence that purchasing power

parity, covered interest parity, and uncovered interest parity hold.

Subjects are endowed with an intrinsically useless (green) currency

that can be used to purchase another useless (red) currency. Green

goods can be bought only with green currency, and red goods can be

bought only with red currency. The foreign exchange markets are

organized as call markets. In the treatment analyzing purchasing

power parity, the price of the red good varies. In a second treatment,

the interest rate on red currency varies. In a third treatment, the

interest rate on red currency varies, and the price of the red good is

random. The paper is 35-page long and can be downloaded at:

http://econ.ohio-state.edu/efisher/pppuip.pdf

Remarks:

Haircuts or Hysteresis? Sources of Movements in Real Exchange Rates

Author: Rogers,John H.; Jenkins, Michael

Book: Journal of International Economics

Year: 1995 Vol: 38(3-4), pages 339-60.

The authors empirically assess the importance of two sources of real

exchange rate movements. In models where purchasing power parity

holds only among traded goods, real exchange rate variation results

from relative price movements within countries. An alternative

explanation relies on hysteretic price-setting and nominal exchange

rate changes. Using disaggregated price data from eleven OECD

nations, the authors find some support for the nontraded goods

models. For example, prices of haircuts in Canada and the United

States are related in the long run. The authors find stronger evidence

to support models that emphasize sticky prices, transportation costs,

or other impediments to frictionless trade.

Remarks:

Risk, Policy Rules, and Noise: Rethinking Deviations from Uncovered Interest Parity

Author: Nelson Mark, Ohio State University Yangru Wu, West Virginia

University

Book:

Year:

This paper attempts to understand why the forward premium helps to

predict the future change in the exchange rate, but with the wrong

(negative) sign. A corollary to the negative forward premium bias is

that the rational deviation from uncovered interest parity (DUIP) is

negatively correlated with the rationally expected rate of depreciation.

These facts have long posed a challenge to international economic

theory. In this paper, they explore three approaches to explain these

puzzles: (i)the standard representative-agent asset pricing model, (ii)a

monetary-policy rule model with exchange-rate feedback, and (iii)a

model of noise trading. They begin by presenting some stylized facts

that characterize the problem. They obtain implied values of the

rational DUIP and the rationally expected depreciation from a vector

error correction model (VECM) for log spot and forward exchange rates

and demonstrate the credibility of the estimates of these unobserved

series by showing that they match a number key sample moments.

With these credible estimates of the rational DUIP in hand, They then

ask if they behave like risk premia implied by the standard

representative agent asset pricing approach. The answer to this

question is no. The risk premium is a conditional covariance between

the intertemporal marginal rate of substitution of money and the

payoff from forward currency speculation. Since the rational DUIP

fluctuates between positive and negative values, according to the risk

premium hypothesis, this conditional covariance must also. Our

empirical analysis shows, however, that required conditional

correlations required by the theory are largely absent from the data.

Next, they re-examine a recent contribution by McCallum~(1994), who

develops a non-risk interpretation of the rational DUIP. There,

monetary policy involves the setting of the interest differential

according to a rule that partially offsets the contemporaneous

depreciation of the domestic currency. The feedback of the

contemporaneous depreciation to the interest differential induces an

error in the variables problem in the regression of the future

depreciation on the forward premium and perfectly negatively

correlated rational DUIPs and rationally expected depreciations. The

error in the variables problem is the source of the forward premium

bias in this model. Their investigation of McCallum's model uncovers

suggests two reasons to apply his results with caution. First, they

report econometric estimates of the policy rule parameters which have

the wrong sign required to explain the forward premium bias. The

second reason is that the results are not robust to a reasonable

reformulation of the policy rule. In the original formulation, the interest

rate differential depends on the contemporaneous rate of depreciation.

A trading sequence that rationalizes this rule is that the foreign

exchange market closes before the monetary policy authorities

determine the current period interest differential. But an alternative

and equally plausible sequence is to have the authorities determine the

interest differential prior to the opening of the foreign exchange

market. Under the alternative sequence, the interest rate rule depends

on the lagged depreciation and the forward premium bias vanishes.

The third approach that they explore is the Delong et. al. noise trader

model. This model combines rational investors with noise traders who

hold distorted beliefs concerning future currency returns. They model

this distortion in beliefs in a particular way by building in Frankel and

Froot's (1989) finding that foreign exchange traders place excessive

weight on the forward premium in forming their expectations of the

future depreciation. Their model of noise-trader beliefs also induces an

error in the variables problem into the forward premium regression

which forms the basis of the noise trader model's explanation of the

forward premium bias. Trading volume is induced entirely by the

presence of noise traders and the rational DUIP is not compensation for

risk. In addition to the forward premium bias, the noise-trader model

provides an explanation for the apparent short-term overreaction of

exchange rate changes and the gradual adjustment towards its

(economic) fundamental value in the long run that has been

documented in recent empirical work.

Remarks: The paper is not available in the Internet, JEL classification

is available -- F31, F47

Co-Movements in Long-Term Interest Rates and the Role of PPP-Based Exchange Rate Expectations

Author: Jan Marc Berk and Klaas H.W. Knot

Book:

Year: April 1999

They investigate international co-movements in bond yields by testing

for uncovered interest parity. They supplement existing work by

focussing on long instead of short-term interest rates, and, related to

that, by employing exchange rate expectations derived from

purchasing power parity instead of actual outcomes. For the major

floating currencies over the period 1975-97, they cannot support the

notion of further increases in co-movement beyond that associated

with the wave of financial market liberalization and deregulation in the

early 1980s. Given the similarity between PPP-based UIP tests and

those employing actual exchange rate outcomes, the value added of

the former mainly lies with their ready availability.

Remarks:

Testing Uncovered Interest Parity at Short and Long Horizons

Author: Menzie Chinn, University of California Guy Meredith, IMF and

HKMA

Book:

Year: July 11, 2000

The unbiasedness hypothesis -- the joint hypothesis of uncovered

interest parity (UIP) and rational expectations -- has been almost

universally rejected in studies of exchange rate movements. In

contrast to previous studies, which have used short-horizon data, we

test this hypothesis using interest rates on longer-maturity bonds for

the G-7 countries. The results of these long-horizon regressions are

much more positive — the coefficients on interest differentials are of

the correct sign, and almost all are closer to the predicted value of

unity than to zero. These results are robust changes in data type and

to base currency (i.e., Deutschemark versus US dollar). We appeal to

an econometric interpretation of the results, which focuses on the

presence of simultaneity in a cointegration framework.

Remarks: The full version of the paper can be download at:

http://econ.ucsc.edu/faculty/chinn/UIP_empr.pdf

"Purchasing Power Parity and Interest Parity in the Laboratory"

Author: Eric O™N. Fisher, Department Of Economics, The Ohio State

University

Book:

Year: 10 April 2001

This paper analyzes purchasing power parity and uncovered interest

parity in the laboratory. It finds strong evidence that purchasing power

parity, covered interest parity, and uncovered interest parity hold.

Subjects are endowed with an intrinsically useless (green) currency

that can be used to purchase another useless (red) currency. Green

goods can be bought only with green currency, and red goods can be

bought only with red currency. The foreign exchange markets are

organized as call markets. In the treatment analyzing purchasing

power parity, the price of the red good varies. In a second treatment,

the interest rate on red currency varies. In a third treatment, the

interest rate on red currency varies, and the price of the red good is

random.

Remarks: The full version of the paper can be downloaded at:

http://economics.sbs.ohio-state.edu/efisher/pppuip.pdf

Nonlinear dynamics and covered interest rate parity

Author: Nathan S. Balke

Book: Empirical Economics

Year: 1998 Vol: Pages: 535-559 Volume: 23 Issue: 4

This paper examines the dynamics of deviations from covered interest

parity using daily data on the UK/US spot, forward exchange rates and

interest rates over the period January 1974 to September 1993. Like

other studies we find a substantial number of instances during the

sample in which the covered interest parity condition exceeds the

transaction costs band, implying arbitrage profit opportunities. While

most of these implied profit opportunities are relatively small, there is

also evidence of some very large deviations from covered interest

parity in the sample. In order to examine the persistence of these

deviations, we estimated a threshold autoregression in which the

dynamics behavior of deviations from covered interest parity is

different outside the transaction costs band than inside them. We find

that while the impulse response functions when inside the transaction

costs band are nearly symmetric, those for the outside the bands are

asymmetric-suggesting less persistence outside of the transaction costs

band than inside the band.


downloaded at:

http://netec.mcc.ac.uk/WoPEc/data/Articles/sprempecov:23:y:1998:i:

4:p:535-559.html

A Century of Purchasing-Power Parity

Author: Alan M. Taylor


Year: November 2000 Vol: No. W8012

This paper investigates purchasing-power parity (PPP) since the late

nineteenth century. I collected data for a group of twenty countries

over one hundred years, a larger historical panel of annual data than

has ever been studied before. The evidence for long-run PPP is

favorable using recent multivariate and univariate tests of higher

power. Residual variance analysis shows that episodes of floating

exchange rates have generally been associated with larger deviations

from PPP, as expected; this result is not attributable to significantly

greater persistence (longer halflives) of deviations in such regimes, but

is due to the larger shocks to the real-exchange rate process in such

episodes. In the course of the twentieth century there was relatively

little change in the capacity of international market integration to

smooth out real exchange rate shocks. Instead, changes in the size of

shocks depended on the political economy of monetary and exchange-

rate regime choice under the constraints imposed by the trilemma.

Remarks: This paper is available in PDF (527 K) format and can be

downloaded at http://papers.nber.org/papers/W8012

An Empirical Test of Purchasing Power Parity in Selected African Countries - a Panel Data Approach

Author: Beatrice Kalinda Mkenda

Book: Scandinavian Working papers in Economics

Year: April 30, 2001 Vol: No 39

The paper tests whether the theory of Purchasing Power Parity holds in

a selected sample of twenty African countries. The paper employs a

panel unit root test to test whether the real exchange rates in the

panel are mean reverting or not. The test employed is the Im et al

(1997) test. Results show that the null of a unit root is rejected for the

three real exchange rate indices, namely, the import-based and trade-

weighted multilateral indices, and the bilateral indices, while for the

export-based indices, the null hypothesis is not rejected. That is,

Purchasing Power Parity is confirmed for the import-based and trade-

weighted multilateral indices, and the bilateral indices, while it is

rejected for the export-based multilateral indices. After performing the

demeaning adjustment to account for cross-sectional dependence, our

results show that the null hypothesis of a unit root is rejected for the

import-based multilateral indices and the bilateral indices, while the

null is not rejected for the trade-weighted multilateral indices.

Purchasing Power Parity is therefore only confirmed for the import-

based multilateral indices and bilateral indices, while it is rejected for

the trade-weighted multilateral indices.

Remarks: The paper in PDF format can be downloaded at:

http://swopec.hhs.se/gunwpe/abs/gunwpe0039.htm

Purchasing Power Parity

Author: Steven M. Suranovic

Book: International Finance Theory & Policy

Year: Vol: Chapter 30

This is an online book which collects materials about International

Finance Theory and Policy. In chapter 30, it covers Purchasing Power

Parity. There are 4 sections in chapter 30: 30-1 Introduction to

Purchasing Power Parity (PPP) 30-2 The Consumer Price Index (CPI)

and PPP 30-3 PPP as a Theory of Exchange Rate Determination 30-4

Problems and Extensions of PPP Problem set is available at the end of

the chapter but the answer key in PDF format is subject to sale!!

Remarks: The book is accessible at:

http://internationalecon.com/v1.0/Finance/ch30/ch30.html

Does Purchasing Power Parity Hold in African Less Developed Countries? Evidence from a Panel Data Unit Root Test.

Author: Holmes, Mark J

Book: Oxford University Press in its journal Journal of African

Economies

Year: March 2000 Vol: Pages: 63-78 Volume: 9 Issue: 1

This study tests for long-run relative purchasing power parity among a

sample of 27 African less developed countries. For this purpose, a new

test advocated by Im and co-workers is employed which allows one to

test for unit roots in heterogeneous panel datasets. This is known as

the t-bar test, by which purchasing power parity is confirmed or

rejected on the basis of whether or not the average augmented

Dickey-Fuller statistic based on demeaned data is significantly different

from zero. Using quarterly data covering the period 1974-97,

purchasing power parity is generally rejected using individual country

unit root tests but support is found using the t-bar test. This suggests

that low power problems in testing for purchasing power parity can be

overcome using this panel data procedure. The findings also support

the view that purchasing power parity is most likely to be found among

high inflation less developed countries and that the half-life of a one-off

random shock to parity is approximately six quarters. These results are

generally confirmed for the 1960-73 period. Copyright 2000 by Oxford

University Press.

Remarks: The paper is not downloadable, but you can get the paper

copy if available.

A Cointegration Analysis of Purchasing Power Parity: 1973-96

Author: MIGUEL D. RAMIREZ AND SHAHRYAR KHAN

Book: International Advances in Economic Research

Year: August 1999 Vol: VOLUME 5 NUMBER 3 Pages 369-385

This paper tests the purchasing power parity (PPP) hypothesis for five

industrial countries using cointegration and error-correction modeling.

The cointegration test indicated that for all countries the PPP

hypothesis holds in the long run but not in the short run. Further, the

error-correction models suggested that deviations of the actual

exchange rate from its long-run PPP value were corrected in

subsequent periods. Finally, the high frequency monthly data models

did a better job of tracking the turning points of the actual data than

the low-frequency quarterly and yearly models.

Remarks: The whole paper is available at:

http://www.iaes.org/journal/iaer/aug_99/ramirez/

A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries

Author: Jeffrey A. Frankel, Andrew K. Rose


Year: February 1995 Vol: No. W5006

Previous time-series studies have shown evidence of mean- reversion

in real exchange rates. Deviations from purchasing power parity (PPP)

appear to have half-lives of approximately four years. However, the

long samples required for statistical significance are unavailable for

most currencies, and may be inappropriate because of regime changes.

In this study, we re-examine deviations from PPP using a panel of 150

countries and 45 annual observations. Our panel shows strong

evidence of mean-reversion that is similar to that from long time-

series. PPP deviations are eroded at a rate of approximately 15%

annually, i.e., their half-life is around four years. Such findings can be

masked in time-series data, but are relatively easy to find in cross-

sections.


http://papers.nber.org/papers/W5006

External Shocks, Purchasing Power Parity, and the Equilibrium Real Exchange Rate

Author: Shantayanan Devarajan, Jeffrey D. Lewis, and Sherman

Robinson

Book: The World Bank Economic Review

Year: January 1993 Vol: Volume 7, Number 1

Two approaches are commonly used to determine the equilibrium real

exchange rate in a country after external shocks: purchasing power

parity (PPP) calculations and the Salter-Swan, tradables-nontradables

model. There are theoretical and empirical problems with both

approaches, and tensions between them. In this article we resolve

these theoretical and empirical difficulties by presenting a model which

is a generalization of the Salter-Swan model and which incorporates

imperfect substitutes for both imports and exports. Within the

framework of this model, the definition of the real exchange rate is

consistent both with that of the PPP approach and with that of the

Salter-Swan model (suitably extended). Our model, however, is

capable of capturing a richer set of phenomena, including terms of

trade shocks and changes in foreign capital inflows. It also provides a

practical way to estimate changes in the equilibrium real exchange

rate, requiring little more information than is required to do PPP

calculations. The results are consistent with those of multisector

computable general equilibrium models, which generalize the trade

specification of the small model.

Remarks: The full text of this article is not available on-line. Many

past issues of the WBER can be purchased for $13 per issue at:

http://www.worldbank.org/research/journals/wber/revjan93/external.h

tm

Purchasing Power Parity: Three Stakes through the Heart of the Unit Root Null

Author:

Book: Staff report of Federal Reserve Bank of New York.

Year: June 1999 Vol: Number 80

A recent influential paper (O'Connell 1998) argues that panel data

evidence in favor of purchasing power parity disappears once test

procedures are altered to accommodate heterogenous cross-sectional

dependence among real exchange rate innovations. We present

evidence to the contrary. First, we modify two extant panel unit root

panel unit root tests to eliminate the upward size distortion induced by

contemporaneous cross-sectional dependence. Second, we exploit a

recently-introduced test, based on SUR techniques, that also remains

valid in the presence of cross-sectional dependence. Using the three

new tests, we find overwhelming evidence in favor of real exchange

rate stationarity during the post-Bretton Woods era among OECD

s. We

also find emphatic evidence of stationarity using O'Connell's GLS test.

Bias-corrected parameter estimates indicate that deviations from PPP

erode more quickly for real exchange rates defined using wholesale

rather than consumer price indices. Monte Carlo experiments indicate

that several of the tests discussed here have considerable power

against the unit root null.

Remarks: The entire paper in PDF format can be downloaded at:

http://www.ny.frb.org/rmaghome/staff_rp/sr80.html

Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price

Author: Alan M. Taylor


Year: March 2000 Vol: No. W7577

The PPP puzzle is based on empirical evidence that international price

differences for individual goods (LOOP) or baskets of goods (PPP)

appear highly persistent or even non-stationary. The present

consensus is these price differences have a half-life that is of the order

of five years at best, and infinity at worst. This seems unreasonable in

a world where transportation and transaction costs appear so low as to

encourage arbitrage and the convergence of price gaps over much

shorter horizons, typically days or weeks. However, current empirics

rely on a particular choice of methodology, involving (i) relatively low-

frequency monthly, quarterly, or annual data, and (ii) a linear model

specification. In fact, these methodological choices are not innocent,

and they can be shown to bias analysis to-wards findings of slow

convergence and a random walk. Intuitively, if we suspect that the

actual adjustment horizon is of the order of days then monthly and

annual data cannot be expected to reveal it. If we suspect arbitrage

costs are high enough to produce a substantial band of inaction' then a

linear model will fail to support convergence if the process spends

considerable time random-walking in that band. Thus, when testing for

PPP or LOOP, model specification and data sampling should not

proceed without consideration of the actual institutional context and

logistical framework of markets.


http://papers.nber.org/papers/W7577

Deviations from Purchasing Power Parity: The Australian Case

Author: Adrian Blundell-Wignall, Marilyn Thomas

Book: Reserve Bank of Australia Discussion Paper

Year: September 1987 Vol: RDP8711

The hypothesis that deviations from PPP follow a random process is

tested against two alternatives: that the real exchange rate reverts to

a constant equilibrium level (long-run PPP); and that it reverts to an

equilibrium level which is itself a function of shifts in commodity prices

(long-run PPP doesn't hold, but for reasons that are predictable). The

random walk hypothesis cannot be rejected if commodity prices are

ignored or if the nominal exchange rate is fixed. It is consistently

rejected when commodity prices are included and the exchange rate is

floating.

Remarks: An electronic version of this paper is not available. To order

a printed copy you have to complete an RDP Order Form at:

http://www.rba.gov.au/PublicationsAndResearch/RDP/RDP_Order/inde

x.html

International price comparisons based on purchasing power parity

Author: Michelle A. Vachris and James Thomas

Book: Monthly Labor Online review

Year: October 1999 Vol: Vol. 122, No. 10

This paper is interesting and you may understand more about PPP via

studying daily cases: magine you are planning a trip to France and

would like to figure out how much currency you will need during your

visit. You would need to know how much in French francs it would cost

for incidentals such as meals, sightseeing, and souvenirs. What

information would be helpful to you in making your estimate? You

could check the price of, say, a lunch in your hometown and then

convert that figure into francs using the exchange rate. This type of

estimate would not be very accurate, however, because it is likely that

a lunch in your hometown costs relatively more or less than a lunch in

France. A better estimate would be based on the price of a lunch in

France. Similarly, if you were opening a subsidiary company in Japan,

how would you determine the salaries for your employees? Again,

using the exchange rate to convert the salary you would pay in the

United States into yen would not be accurate. To adequately

compensate employees moving overseas, you would need information

about the cost of living in Japan. Finally, if a government or

international organization were comparing national expenditures across

different countries, merely collecting the gross domestic products

(GDPs) of the countries and using exchange rates to convert them into

a single currency would not yield an accurate comparison. Again, the

comparison based on exchange rates does not take into account

differing prices among the countries.


http://stats.bls.gov/opub/mlr/1999/10/art1exc.htm

Official Exchange Rate Arrangements and Real Exchange Rate Behavior

Author: David C. Parsley and Helen A. Popper

Book: Journal of Money, Credit and Banking

Year: March 2000

Here is the abstract of the paper: We study the behavior of real

exchange rates under various official designations of exchange rate

arrangements. Examining many currencies, we find important

differences across the designations. Most notably, real exchange rate

mean reversion is fastest when nominal exchange rates are officially

pegged. We also find a large nonlinear effect: adjustment is fastest

when the real exchange rate deviates greatly from its mean. This

nonlinear effect is also most striking among officially pegged

currencies. Finally, we find that nominal exchange rates, rather than

prices, do most of the adjusting.


http://mba.vanderbilt.edu/fmrc/papers/wp9730.htm

Testing Deviations from Purchasing Power Parity (PPP)

Author: Aizenman, Joshua


Year: 1984 Vol: NBER Working Paper:1475

The purpose of this paper is to study analytically how the presence of

transportation costs in a model of deviations from PPP affects the

testing procedure of the PPP hypothesis. The analysis shows that in the

presence of transportation costs traditional regression analysis will

tend to reject the PPP hypothesis even if goods markets are well

arbitraged, because the values of the regression coefficients are

affected systematically by considerations that are independent of the

degree to which markets are arbitraged. Thus, the content of the PPP

approach cannot be tested satisfactorily without considering the

systematic affects of transportation costs and other costs of goods

arbitrage.

Remarks:

Monopolistic Competition and Deviations from PPP

Author: Aizenman, Joshua


Year: 1985 Vol: NBER Working Paper:1552

The purpose of this paper is to explain deviations from PPP in an

economy characterized by a monopolistic competitive market structure

in which pricing decisions incur costs that lead producers to pre-set the

price path for several periods. The paper derives an optimal pricing

rule, including the optimal pre-setting horizon. It does so for a rational

expectation equilibrium, characterized by staggered, unsynchronized

price setting, for which the degree of staggering is endogenously

determined. The discussion focuses on the critical role of the degree of

domestic-foreign goods substitutability in explaining observable

deviations from PPP.

Remarks:

Idiosyncratic Tastes in a Two-Country Optimizing Model: Implications of a Standard Presumption

Author: Warnock, Francis E.

Book: Board of Governors of the Federal Reserve System, International

Finance Discussion Paper

Year: 1998 Vol: 631, pages 21

International spillovers and exchange rate dynamics are examined in a

two-country dynamic optimizing model that allows for idiosyncratic

tastes across countries. Specifically, there is a home-good bias in

consumption patterns: at given relative prices the ratio of home goods

consumed to foreign goods consumed is higher in the home country.

The setup nests Obstfeld and Rogoff (1995), who assume identical

tastes. Allowing for idiosyncratic tastes produces results that differ

from Obstfeld and Rogoff's: expansionary monetary policy increases

home utility by more, the positive spillovers of a fiscal expansion are

reduced, and both short-run and long-run deviations from

consumption-based purchasing power parity (PPP) are possible. The

model's predictions are broadly consistent with those from the Frenkel,

Razin and Yuen (1996) version of the two-country Mundell-Fleming

model and with observed behavior of real and nominal exchange rates.

Remarks:

Beyond the Purchasing Power Parity: Testing for Cointegration and Causality between Exchange Rates, Prices, and Interest Rates

Author: Cheng, Benjamin S.

Book: Journal of International Money and Finance

Year: 1999 Vol: 18(6), pages 911-24.

This paper reexamines the causality between the dollar and the yen in

a multivariate framework with the aid of cointegration and error-

correcting modeling for the 1951-94 period. The Phillips-Perron tests

and Johansen's tests are performed. While causality from interest rates

to exchange rates is found in the short run, no causality between

prices and exchange rates is found in the short run. However, causality

is found running from relative prices to exchange rates along with

interest rates between the U.S. and Japan in the long run, which

supports the long-run PPP hypothesis.

Remarks:

Does PPP Hold between Asian and Japanese Economies? Evidence Using Panel Unit Root and Panel Cointegration

Author: Azali, M.; Habibullah, M. S.; Baharumshah, A. Z.

Book: Japan and the World Economy

Year: 2001 Vol: 13(1), pages 35-50.

This paper presents an empirical analysis of panel unit root and panel

cointegration tests of long-run absolute purchasing power parity (PPP)

for seven Asian developing economies (ADE). The evidence shows that

the panel parametric and non-parametric tests either with a trend term

or without a trend term support the hypothesis of cointegration

between the bilateral exchange rates and relative prices against the

selected foreign country--Japan.

Remarks:

An Empirical Investigation into the Causes of Deviations from Covered Interest Parity across the Tasman

Author: Moosa, Imad A.

Book: New Zealand Economic Papers

Year: 1996 Vol: 30(1), pages 39-54.

This paper examines deviations from the equilibrium condition implied

by covered interest parity as applied to the exchange rate between the

Australian and New Zealand dollars over the period 1985 to 1994.

Formal empirical evidence shows that spot and forward speculation do

not play any role in determining the forward exchange rate. The

significant deviations in 1985 are attributed to political risk. Further

shrinkage of the deviations in the 1990s is attributed to a possible

reduction in transaction costs resulting from financial deregulation.

Remarks:

Exchange Controls, Political Risk and the Eurocurrency Market: New Evidence from Tests of Covered Interest Rate Parity

Author: Cody, Brian J.

Book: International Economic Journal

Year: 1990 Vol: 4(2), pages 75-86.

This study employs daily data to examine the effects on Eurocurrency

and onshore returns of the May 21, 1981 imposition of exchange

controls by French President Mitterand. Prior to this time, transaction

costs explain the average onshore deviations from covered parity;

however, these averages ignore short-lived political risk premia which

emerged just before the imposition of controls. As expected, there is

no evidence of political risk on Eurocurrency markets. Yet when

exchange controls were in effect, premia in excess of transaction costs

surfaced on nonfranc Eurocurrency deposits at the time of devaluations

of the franc within the EMS.

Remarks:

Forward and Spot Exchange Rates

Author: Fama, Eugene F.

Book: Journal of Monetary Economics

Year: 1984 Vol: 14(3), pages 319-38.

In this study Fama decomposes the forward premium into a risk

premium and an expected depreciation premium based on the

information set available. By constructing a statistical model on this

relation, he finds the relative importance of the risk premium and the

expected depreciation premium.

Remarks:

Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market

Author: Frankel, Jeffrey A.; Froot, Kenneth

Book: International Monetary Fund Working

Year: 1990 Vol: Paper: WP/90/43, pages 26.

This paper examines the dynamics of the foreign exchange market.

The first half addresses a number of key questions regarding the

forecasts of future exchange rates made by market participants, by

means of updated estimates using survey data. Here the authors follow

most of the theoretical and empirical literature in acting as if all market

participants share the same expectation. The second half then

addresses the possibility of heterogeneous expectations, particularly

the distinction between "chartists" and "fundamentalists," and the

implications for trading in the foreign exchange market and for the

formation of speculative bubbles.

Remarks:

A Multivariate GARCH Model of Risk Premia in Foreign Exchange

Markets

Author: Malliaropulos, Dimitrios

Book: Economic Modelling

Year: 1997 Vol: 14(1), pages 61-79.

This paper investigates the existence of time-varying risk premia in

deviations from uncovered interest parity based on the market capital

asset pricing model. The empirical analysis is conducted using a broad

data set of seven major currencies against the US dollar, and a world

equity index in order to approximate the benchmark portfolio. The

conditional covariance matrix of excess returns is modelled as a

multivariate GARCH process. The results indicate significant conditional

systematic risk. Estimated conditional beta coefficients are very similar

across currencies and behave uniformly over time. The explanatory

power of the model is significantly higher compared to the constant

beta CAPM specification. Furthermore, estimation results suggest that

(1) expected excess returns are less volatile in foreign exchange

markets compared to stock markets, and (2) including nominal dollar

assets in international equity portfolios can reduce overall portfolio

risk.

Remarks:

International Financial Relations under the Current Float: Evidence from Panel Data

Author: Lothian, James R.; Simaan, Yusif

Book: Open-Economies-Review

Year: 1998 Vol: 9(4), pages 293-313.

This paper uses multi-country data for the period 1973-94 to

investigate five key equilibrium conditions in international finance--

purchasing power parity, the Fisher equation, uncovered interest

parity, and the equity-return analogues of the latter two. The results

are largely consistent with theoretical expectations. Over the long run,

purchasing power parity, uncovered interest parity and the Fisher

effect prove to be rather good first approximations. The equity-return

relations, though somewhat less so are nevertheless much better

behaved than past studies would lead one to expect. Average rates of

equity returns keep pace with inflation within countries in almost all

instances; across countries, they are positively correlated with average

rates of inflation. This is particularly the case when the data period is

extended to include earlier decades.

Remarks:

An Alternative Approach to Testing Uncovered Interest Parity

Author: Bhatti, Razzaque H.; Moosa, Imad A.

Book: Applied-Economics-Letters

Year: 1995 Vol: 2(12), pages 478-81.

Supportive evidences of UIP hypothesis through a cointegration

analysis. The authors compare the Treasury bill rates denominated in

11 currencies to the U.S. dollar, and find a long-run relationship in all

cases.

Remarks:

Uncovered Interest Parity in Crisis: The Interest Rate Defense in the 1990s

Author: Flood, Robert P; Rose, Andrew K.

Book:

Year: 2001 Vol: This paper is available online at

http://haas.berkeley.edu/~arose/UIPC.pdf

This paper tests for uncovered interes parity (UIP) using daily data for

twenty-three developing and developed countries through the crisis-

strewn 1990s. The authors find that UIP works better on average in the

1990s than previous eras in the sense the slope coefficient from a

regression of exchange rate changes on interest differentals yields a

positive coefficient (which is sometimes insignificantly different from

unity). UIP works systematically worse for fixed and flexible exchange

countries than for crisis countries, but we find no significant differences

between rich and poor countries. Finally, the authors find evidence that

varies considerably across countries and time, but is usually weakly

consistent with an effective "interest defense" of the exchange rate.

Remarks:

An Intraday Analysis of the Effectiveness of Foreign Exchange Intervention

Author: Neil Beattie and Jean-François Fillion

Book:

Year: February 1999

This paper assesses the effectiveness of Canada's official foreign

exchange intervention in moderating intraday volatility of the

Can$/US$ exchange rate, using a 2-1/2-year sample of 10-minute

exchange rate data. The use of high frequency data (higher than daily

frequency) should help in assessing the impact of intervention since

the foreign exchange market is efficient and reacts rapidly to new

information. The estimated equations explain volatility in terms of four

major factors: intraday seasonal pattern; daily volatility persistence;

macroeconomic news announcements; and the impact of central bank

intervention. Rule-based (or expected) intervention apparently had no

direct impact on the reduction of foreign exchange volatility, although

the existence of a non-intervention band seemed to provide a small

stabilizing influence. This result is interpreted to mean that the

stabilizing effect of expected intervention came into play as the

Canadian dollar approached the upper or lower limits of the band.

When the dollar exceeded the band, actual intervention did not have

any direct impact because it was expected. Moreover, the results show

that discretionary (or unexpected) intervention might have been

effective in stabilizing the Canadian dollar, although the impact of an

intervention sequence diminished as it increased beyond a few days.

Remarks: The paper can be downloaded in PDF format at:

http://www.bankofcanada.ca/publications/working.papers/1999/wp99-

4.pdf

Measuring the Profitability and Effectiveness of Foreign Exchange Market Intervention: Some Canadian Evidence

Author: John Murray, Mark Zelmer, and Shane Williamson

Book: Technical Report No. 53

Year: March 1990

When the major industrial countries decided to move to a system of

managed flexible exchange rates following the collapse of the Bretton

Woods system, many observers thought that this would reduce, if not

eliminate, the need for official foreign exchange market intervention.

During the past fifteen years, however, intervention in most countries,

including Canada, has risen steadily in both frequency and intensity.

This paper presents new empirical evidence on the profitability and

effectiveness of Canadian intervention from 1975 to 1988. The results

suggest that the government's foreign exchange operations have been

very profitable and have tended to be stabilizing, in the sense that

authorities were typically pushing the exchange rate towards its long-

run trend and helping to reduce short-run volatility in the market.

Remarks: We can order printed copies of this paper at no charge

from: Publications Distribution, Bank of Canada 234 Wellington Street,

Ottawa, Canada K1A 0G9 E-mail: publications@bank-banque-

canada.ca Telephone: 613-782-8248 Fax: 613-782-8874

The Temporal Pattern of Trading Rule Returns and Central Bank Intervention: Intervention Does Not Generate Technical Trading Rule Profits


Book:

Year: November 2000

It is provided by the Federal Reserve Bank of St. Louis. This paper

characterizes the temporal pattern of trading rule returns and official

intervention for Australian, German, Swiss and U.S. data to investigate

whether intervention generates technical trading rule profits. High

frequency data show that abnormally high trading rule returns precede

German, Swiss and U.S. intervention, disproving the hypothesis that

intervention generates inefficiencies from which technical rules profit.

Australian intervention precedes high trading rule returns, but

trading/intervention patterns make it implausible that intervention

actually generates those returns. Rather, intervention responds to

exchange rate trends from which trading rules have recently profited.


http://www.stls.frb.org/docs/research/wp/2000-018C.pdf



Book:

Year: January 2001












Technical Analysis and Central Bank Intervention

Author: Christopher Neely and Paul Weller

Book:

Year: Feburary 2000

This paper extends the genetic programming techniques developed in

Neely, Weller and Dittmar (1997) to provide some evidence that

information about U.S. foreign exchange intervention can improve

technical trading rules?profitability for two of four exchange rates over

part of the out-of-sample period. Rules tend to take positions contrary

to official intervention and are unusually profitable on days prior to

intervention, indicating that intervention is intended to check or

reverse predictable trends. Intervention seems to be more successful

in checking predictable trends in the out-of-sample (1981-1998) period

than in the in-sample (1975-1980) period. We conjecture that

instability in the intervention process prevents more consistent

improvement in the excess returns to rules. We find that the

improvement in performance results from more precise estimation of

the information in the past exchange rate series, rather than from

information about contemporaneous intervention.



The exchange rate and the MPC: What can we do?

Author: Sushil Wadhwani

Book: Bank of England. Quarterly Bulletin; London

Year: Aug 2000 Vol: Vol. 40, Iss. 3; pg. 297-306, 10 pgs

In Sushil Wadhwani's speech (member of the Bank of England's

Monetary Policy Committee), he argued that looking only at a two-year

ahead inflation forecast when setting interest rates is likely to be

suboptimal, and that allowing asset price misalignments to have an

additional impact on interest rates could enable a reduction in the

volatility of inflation. Currently, sterling is probably overvalued against

the euro, and so this might affect the appropriate level of interest rates.

He also suggested that, under certain circumstances, sterilized

intervention can be effective.



&Mtd=1&Idx=36&Sid=1&RQT=309&Q=1&IE=x.pdf

The Use of Fundamental and Technical Analyses by Foreign Exchange Dealers: Honk Kong Evidence

Author: Lui,Yu Hon; Mole, David

Book: Journal of International Money and Finance

Year: 1998 Vol: 17(3), pages 535-45.

This article reports the results of a questionnaire survey conducted in

February 1995 on the use by foreign exchange dealers in Hong Kong of

fundamental and technical analyses to form their forecasts of exchange

rate movements. The authors' findings reveal that > 85 percent of

respondents rely on both fundamental and technical analyses for

predicting future rate movements at different time horizons. At shorter

horizons, there exists a skew towards reliance on technical analysis as

opposed to fundamental analysis, but the skew becomes steadily

reversed as the length of horizon considered is extended. Technical

analysis is considered slightly more useful in forecasting trends than

fundamental analysis, but significantly more useful in predicting

turning points. Interest rate-related news is found to be a relatively

important fundamental factor in exchange rate forecasting, while

moving average and/or other trend-following systems are the most

useful technical technique.

Remarks:

Does Central Bank Intervention Stabilize Foreign Exchange Rates?

Author: Catherine Bonser-Neal

Book: Federal Reserve Bank of Kansas City

Year:

This paper is written by Catherine Bonser-Neal. It's about the

exchange rate volatility, its causes and its consequence, how it

measures, how central bank intervention affects the volatility, etc.


http://www.kc.frb.org/publicat/econrev/pdf/1q96bons.pdf



Book:

Year:









