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The Immediate Impact and Persistent Effect of FX Purchases on the Exchange Rate

Author

Listed:
  • Itamar Caspi

    (Bank of Israel)

  • Amit Friedman

    (Bank of Israel)

  • Sigal Ribon

    (Bank of Israel)

Abstract

In recent years, foreign exchange (FX) interventions have been routinely used by the Bank of Israel and other central banks as an additional monetary instrument to moderate appreciation trends of the domestic currency. This paper analyzes the immediate effect of the Bank of Israel’s FX interventions on the exchange rate and its persistence over time. To identify this effect, we first measure the intraday impact of FX intervention using a novel confidential, high-frequency, minute-by-minute data set of interventions between 2009 and 2017. Next, we use our measure to estimate the persistence of FX intervention shocks over longer horizons (in trading days), using local projections. We find that FX intervention shocks cause, on impact, USDILS exchange rate depreciation in over 90 percent of the cases. We also find that this effect has a persistent effect on the USDILS exchange rate for 40–60 trading days.

Suggested Citation

  • Itamar Caspi & Amit Friedman & Sigal Ribon, 2022. "The Immediate Impact and Persistent Effect of FX Purchases on the Exchange Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 18(5), pages 1-31, December.
    • Handle: RePEc:ijc:ijcjou:y:2022:q:5:a:4
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    References listed on IDEAS

    as
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    Cited by:

    1. Michel Strawczynski, 2018. "Book Review: The Israeli Economy By Joseph Zeira," Israel Economic Review, Bank of Israel, vol. 16(1), pages 105-112.
    2. Boris Hofmann & Hyun Song Shin & Mauricio Villamizar-Villegas, 2019. "FX intervention and domestic credit: Evidence from high-frequency micro data," BIS Working Papers 774, Bank for International Settlements.
    3. Benchimol, Jonathan & Gamrasni, Inon & Kahn, Michael & Ribon, Sigal & Saadon, Yossi & Ben-Ze’ev, Noam & Segal, Asaf & Shizgal, Yitzchak, 2022. "The interaction between domestic monetary policy and macroprudential policy in Israel," Economic Modelling, Elsevier, vol. 112(C).
    4. Markus Hertrich & Daniel Nathan, 2022. "Foreign Exchange Interventions and their Impact on Expectations: Evidence from the USD/ILS Options Market," Bank of Israel Working Papers 2022.10, Bank of Israel.
    5. Vesna Martin, 2018. "The Exchange Rate Commitment As Additional Instrument Of Monetary Policy In Czech Republic, Switzerland And Israel," Ekonomske ideje i praksa, Faculty of Economics and Business, University of Belgrade, issue 31, pages 41-57, December.
    6. Yossi Yakhin, 2024. "Foreign Exchange Interventions in the New-Keynesian Model: Transmission, Policy, and Welfare," Bank of Israel Working Papers 2024.01, Bank of Israel.

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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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