Japanese and Federal Reserve Intervention in the Yen-US Dollar Market: A Coordination Channel of FX Operations?

29 Pages Posted: 10 Jul 2008

See all articles by Mark P. Taylor

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School; Centre for Economic Policy Research (CEPR); Brookings Institution

Stefan Reitz

University of Giessen; Deutsche Bundesbank

Date Written: April 2008

Abstract

The coordination channel has recently been established as an additional means by which foreign exchange market intervention may be effective. In Sarno and Taylor (2001) it is conjectured that strong and persistent misalignments of the exchange rate are caused by a coordination failure among fundamentals-based traders. In such situations official intervention may act as a coordinating signal, encouraging traders to engage in stabilizing speculation. We apply the framework developed in Reitz and Taylor (2008) to daily data on the yen-US dollar exchange rate and on Federal Reserve and Japanese Ministry of Finance intervention operations. The results provide further support for the coordination channel of intervention effectiveness.

Keywords: foreign exchange intervention, coordination channel, market microstructure, nonlinear mean reversion

JEL Classification: C10, F31, F41

Suggested Citation

Taylor, Mark P. and Reitz, Stefan and Reitz, Stefan, Japanese and Federal Reserve Intervention in the Yen-US Dollar Market: A Coordination Channel of FX Operations? (April 2008). Available at SSRN: https://ssrn.com/abstract=1157679 or http://dx.doi.org/10.2139/ssrn.1157679

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Stefan Reitz (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

University of Giessen ( email )

Volkswirtschaftslehre III
Licher Str. 66
D-35394 Giessen
Germany
+49-641-9922114 (Phone)
+49-641-9922119 (Fax)

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