The Effectiveness of Official Foreign Exchange Intervention in a Small Open Economy: The Case of the Canadian Dollar

Bank of Canada Working Paper No. 2005-21

52 Pages Posted: 9 Aug 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: July 2005

Abstract

The Bank of Canada is one of very few central banks that has made records of the intraday timing of its intervention operations available to researchers. This paper investigates the effectiveness of sterilized intervention in the Canadian dollar exchange rate market over the period January 1995 to September 1998. We employ an event study methodology and different criteria for success and we use both daily data and high-frequency (intraday) intervention and exchange rate data. The time-period covers two distinct intervention regimes characterized by mechanistic and discretionary intervention, respectively. Furthermore, the paper addresses the issue of currency co-movements by carrying out the analysis using both the readily observable CAD/USD exchange rate as well as the CAD/USD exchange rate adjusted for general currency co-movements against the USD. When analyzing the high-frequency data, we find evidence 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. When investigating exchange rate movements around intervention events using daily data, we find some evidence supportive of effectiveness. These effects, however, are weakened when adjusting for currency co-movements against the USD.

Keywords: Foreign exchange intervention, intraday data, event studies

JEL Classification: E58, F31, G14, G15

Suggested Citation

Fatum, Rasmus and King, Michael Robert, The Effectiveness of Official Foreign Exchange Intervention in a Small Open Economy: The Case of the Canadian Dollar (July 2005). Bank of Canada Working Paper No. 2005-21, Available at SSRN: https://ssrn.com/abstract=771764 or http://dx.doi.org/10.2139/ssrn.771764

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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