Rules Versus Discretion in Foreign Exchange Intervention: Evidence from Official Bank of Canada High-Frequency Data

SCCIE Working Paper No. 04-24

34 Pages Posted: 26 May 2005

See all articles by Rasmus Fatum

Rasmus Fatum

University of Alberta - Department of Marketing, Business Economics & Law

Michael R. King

Gustavson School Of Business

Date Written: May 12, 2005

Abstract

This paper analyzes official, high-frequency Bank of Canada intervention and exchange rate data (the latter quoted at the end of every 5-minute interval over every 24-hour period) over the January 1995 to September 1998 time-period. The data is of particular interest as it spans over two distinctly different intervention regimes - one characterized by purely rules-based ("mechanistic") intervention versus one characterized by both rules-based and discretionary intervention. This unique feature of the data allows for both a comparison of the effects of rules-based version discretionary intervention and a general investigation of intraday effects of intervention. Employing an event-study methodology and three different criteria for success, the study presents strong evidence showing that intervention systematically affects movements in the CAD/USD and in the desired direction along with some evidence that intervention is associated with a reduction of exchange rate volatility. Interestingly, there is no indication that discretionary intervention is more effective than rules-based intervention.

Keywords: Foreign exchange intervention, intraday data, event studies

JEL Classification: E58, F31, G14, G15

Suggested Citation

Fatum, Rasmus and King, Michael Robert, Rules Versus Discretion in Foreign Exchange Intervention: Evidence from Official Bank of Canada High-Frequency Data (May 12, 2005). SCCIE Working Paper No. 04-24, Available at SSRN: https://ssrn.com/abstract=606303 or http://dx.doi.org/10.2139/ssrn.606303

Rasmus Fatum (Contact Author)

University of Alberta - Department of Marketing, Business Economics & Law ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-3951 (Phone)
780-492-3325 (Fax)

HOME PAGE: http://www.bus.ualberta.ca/rfatum

Michael Robert King

Gustavson School Of Business ( email )

University of Victoria
Business & Economics Building, Room 246
Victoria, British Columbia V8W 2Y2
Canada
250-721-6425 (Phone)

HOME PAGE: http://https://www.uvic.ca/gustavson/faculty/faculty/faculty/current/kingm.php

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