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The Impact of a Central Bank's Bond Market Intervention on Foreign Exchange Rates

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Listed:
  • Robert Jarrow

    (Johnson Graduate School of Management, Cornell University, Ithaca, NY, 14853, USA;
    Kamakura Corporation, USA)

  • Hao Li

    (Johnson Graduate School of Management, Cornell University, Ithaca, NY, 14853, USA)

Abstract

This paper provides a framework to analyze the effect of a central bank's bond market intervention on foreign exchange rates. Using this framework, we quantify the impact of the Federal Reserve's 2008–2011 quantitative easing (QE) program on the USD/JPY exchange rate. We find that the Fed's QE accounts for a significant portion of the dollar's depreciation during this period. A central monetary authority can affect exchange rates in two ways, either directly by intervening in foreign exchange markets or indirectly by affecting interest rates. Our analysis emphasizes the importance of the indirect channel when a central bank undertakes large scale asset purchases.

Suggested Citation

  • Robert Jarrow & Hao Li, 2015. "The Impact of a Central Bank's Bond Market Intervention on Foreign Exchange Rates," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-34.
    • Handle: RePEc:wsi:qjfxxx:v:05:y:2015:i:02:n:s2010139215500093
    DOI: 10.1142/S2010139215500093
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    References listed on IDEAS

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