The Dynamic Impact of FX Interventions on Financial Markets

64 Pages Posted: 30 Mar 2020

See all articles by Lukas Menkhoff

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Malte Rieth

German Institute for Economic Research (DIW Berlin)

Tobias Stoehr

Kiel Institute for the World Economy; German Institute for Economic Research (DIW Berlin); IZA

Date Written: March 2020

Abstract

Evidence on the effectiveness of FX interventions is either limited to short horizons or hampered by debatable identification. We address these limitations by identifying a structural vector autoregressive model for the daily frequency with an external instrument. Generally, we find, for freely floating currencies, that FX intervention shocks significantly affect exchange rates and that this impact persists for months. The signaling channel dominates the portfolio channel. Moreover, interest rates tend to fall in response to sales of the domestic currency, whereas stock prices of large (exporting) firms increase after devaluation of the domestic currency.

Keywords: Foreign exchange intervention, structural VAR, exchange rates, interest rates, stock prices

JEL Classification: F31,F33,E58

Suggested Citation

Menkhoff, Lukas and Rieth, Malte and Stoehr, Tobias, The Dynamic Impact of FX Interventions on Financial Markets (March 2020). DIW Berlin Discussion Paper No. 1854, Available at SSRN: https://ssrn.com/abstract=3561519 or http://dx.doi.org/10.2139/ssrn.3561519

Lukas Menkhoff (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

Malte Rieth

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Tobias Stoehr

Kiel Institute for the World Economy ( email )

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

IZA ( email )

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