Daily Effects of Foreign Exchange Intervention: Evidence from Official Bank of Canada Data
UC Santa Cruz International Economics Working Paper No. 05-12
29 Pages Posted: 12 Jul 2005
Date Written: June 2005
Abstract
This paper analyzes the effects of official, daily Bank of Canada intervention in the CAD/USD exchange rate market over the January 1995 to September 1998 period. Using an event study methodology and different criteria for effectiveness, movements in the CAD/USD exchange rate over the 1 through 10 days surrounding intervention events are investigated. It is shown that Bank of Canada intervention was systematically associated with both a change in the direction and a smoothing of the CAD/USD exchange rate. Bank of Canada intervention did not, however, succeed in reducing the volatility of the CAD/USD exchange rate. Additionally, the paper introduces the issue of currency co-movements to the intervention literature. It is shown that the effects of intervention are weakened when adjusting for general currency co-movements against the USD, suggesting that currency co-movements should be taken into account when addressing the effects of central bank intervention aimed at managing a minor currency vis-a-vis a major currency.
Keywords: Foreign Exchange Intervention, Event Studies, Currency Co-movement
JEL Classification: E58, F31, G14, G15
Suggested Citation: Suggested Citation
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