The Role for Long‐Run Target Values of the Exchange Rate in the Bank of Japan's Policy Reaction Function

30 Pages Posted: 13 Sep 2017

See all articles by Joscha Beckmann

Joscha Beckmann

University of Duisburg-Essen - Department of Economics and Business Administration

Michael Kuehl

Deutsche Bundesbank - Economics Department

Date Written: September 2017

Abstract

This paper analyses whether the Bank of Japan (BoJ) had fundamental concepts in mind when carrying out interventions in the foreign exchange market. We start by considering different long‐run fundamental target values based on a monetary exchange rate model and compare them with more ad hoc targets. Based on these findings, we explain the intervention probability for the BoJ after 1991 based on an ordered probit model by accounting for subperiods and asymmetric effects. It turns out that estimated fundamentally based values for the exchange rate provide additional information for the decision to intervene, in particular after 1995. However, short‐run ad hoc targets seem to be very important, in particular from 1991 until 1995, while medium‐run ad hoc targets gain importance at the end of the 1990s. Overall, we find a ‘leaning against the wind’ strategy in the event of overvaluation relies on ad hoc targets while intervention in cases of undervaluation seems to be guided more strongly by deviations from fundamental values.

Suggested Citation

Beckmann, Joscha and Kühl, Michael, The Role for Long‐Run Target Values of the Exchange Rate in the Bank of Japan's Policy Reaction Function (September 2017). The World Economy, Vol. 40, Issue 9, pp. 1836-1865, 2017, Available at SSRN: https://ssrn.com/abstract=3036154 or http://dx.doi.org/10.1111/twec.12448

Joscha Beckmann (Contact Author)

University of Duisburg-Essen - Department of Economics and Business Administration ( email )

Universitätsstr. 9
Essen, 45141
Germany

Michael Kühl

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

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