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Understanding the Dynamics of Foreign Exchange Interventions and Monetary Policy: Four Empirical Studies
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- Author(s) / Creator(s)
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SSHRC IG awarded 2024: The proposed research program consists of four separate empirical studies that address unresolved current and policy relevant questions in the common theme of central bank foreign exchange intervention and monetary policy. Project 1 proposes to use publicly unavailable transactions-level foreign exchange intervention data provided by Danmarks Nationalbank (DN) alongside tick-by-tick exchange rate data to consider whether intervention sales of domestic currency carried out during a negative interest rate policy regime (NIRP) when intervention cannot credibly signal future policy changes are capable of generating short-term exchange rate effects. The baseline methodology will build on the time-series analysis approach of Andersen, Bollerslev, Diebold and Vega (2003, 2007), as applied in Fatum and Pedersen (2009) and Fatum, Pedersen and Sørensen (2013). Project 2 proposes to use the 2022 and the 2010-2011 Bank of Japan foreign exchange interventions to consider if large-scale and infrequent interventions are capable of generating long-term exchange rate effects. Intervening after no intervention activity for several years and in massive amounts indicates a policy shift that is not implemented with the intention of generating short-term exchange rate effects, thus these particular interventions provide an opportunity to consider if interventions carried out in this manner are associated with long-term exchange rate effects. The methodology will build on the synthetic control method (SCM) originally proposed by Abadie et al. (2010, 2015). Project 3 proposes to consider the one-time 2021 SDR general allocation as an exogenous treatment shock in order to implement a controlled experiment that addresses endogeneity concerns associated with assessing if reserve accumulation leads to private sector risk-taking. The methodology will rely on difference-in-difference estimations, in the vein of Card and Krueger (1998), as adapted by Chițu (2021), and it will employ the risk taking measures suggested by Fatum and Yetman (2020). Project 4 proposes to investigate how asset prices respond to macroeconomic news after NIRP. Macroeconomic news provide clues on the state of the economic environment and thus the possible need for further monetary policy tightening or if a softening stance is in sight. The findings will have policy implications for central bank policy transparency and for the ability of monetary policy to stimulate aggregate demand. The methodology will build on the two-step estimation procedure of Swanson and Williams (2014a,b), as applied in Fatum, Hara and Yamamoto (2023).
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- Date created
- 2023-09-29
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- Type of Item
- Research Material
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- License
- ©️Fatum, Rasmus. All rights reserved other than by permission. This document embargoed to those without UAlberta CCID until 2031.