Does Foreign Exchange Intervention Signal Future Monetary Policy?

47 Pages Posted: 12 Apr 2004

See all articles by Graciela Kaminsky

Graciela Kaminsky

National Bureau of Economic Research (NBER); George Washington University - Department of Economics

Karen K. Lewis

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: March 1993

Abstract

A frequently cited explanation for why sterilized interventions may affect exchange rates is that these interventions signal central banks' future monetary policy intentions. This explanation presumes that central banks in fact back up interventions with subsequent changes in monetary policy. We empirically examine this hypothesis using data on market observations of U.S. intervention together with monetary policy variables, and exchange rates. We strongly reject the hypothesis that interventions convey no signal. However, we also find that in some episodes, intervention signaled changes in monetary policy in the opposite direction of the conventional signaling story. This finding can explain why in some periods exchange rates moved in the opposite direction of that suggested by intervention.

Suggested Citation

Kaminsky, Graciela and Lewis, Karen Kay, Does Foreign Exchange Intervention Signal Future Monetary Policy? (March 1993). NBER Working Paper No. w4298. Available at SSRN: https://ssrn.com/abstract=286955

Graciela Kaminsky (Contact Author)

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Karen Kay Lewis

University of Pennsylvania - Finance Department ( email )

The Wharton School
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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