Identifying the Effects of Central Bank Intervention

FRB of St. Louis Working Paper No. 2005-031A

58 Pages Posted: 29 Jul 2005

See all articles by Christopher J. Neely

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

Date Written: May 2005

Abstract

Most intervention studies have been silent on the assumed structure of the economic system - implicitly imposing implausible assumptions - despite the fact that inference depends crucially on such issues. This paper proposes to identify the cross-effects of intervention with the level and volatility of exchange rates using the likely timing of intervention, macroeconomic announcements as instruments and the nonlinear structure of the intervention reaction function. Proper identification of the effects of intervention indicates that it is moderately effective in changing the levels of exchange rates but has no significant effect on volatility. The paper also illustrates that such inference depends on paying careful attention to seemingly innocuous identification assumptions.

Keywords: Foreign exchange, intervention, identification, Tobit, friction model

JEL Classification: F31, F37, G14, C22, C24

Suggested Citation

Neely, Christopher J., Identifying the Effects of Central Bank Intervention (May 2005). FRB of St. Louis Working Paper No. 2005-031A, Available at SSRN: https://ssrn.com/abstract=762505 or http://dx.doi.org/10.2139/ssrn.762505

Christopher J. Neely (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8568 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://www.stls.frb.org/research/econ/cneely/

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