Communication and exchange rate policy

Monetary authorities in the G3 economies have shifted in recent years towards communication as their primary policy tool to influence exchange rates. The paper assesses the effectiveness of communication, or oral interventions, by the G3 monetary authorities. It provides two key findings. First, G3 communication policies have constituted an effective policy tool in influencing exchange rates in the desired direction. And second, communication has been effective independently from the stance and direction of monetary policy and the occurrence of actual interventions. By contrast, the effectiveness of communication is strongly related to the degree of uncertainty and the positioning of participants in FX markets. Taken together, the results provide support for micro-based approaches to exchange rate modeling and are consistent with the argument that interventions affect exchange rates primarily through a coordination channel rather than a signaling channel.