IDEAS home Printed from https://ideas.repec.org/a/kap/openec/v25y2014i2p311-336.html
   My bibliography  Save this article

The Signalling Channel of Central Bank Interventions: Modelling the Yen/US Dollar Exchange Rate

Author

Listed:
  • Yu-Fu Chen
  • Michael Funke
  • Nicole Glanemann

Abstract

This paper presents a theoretical framework analysing the signalling channel of exchange rate interventions as an informational trigger. We develop an implicit target zone framework with learning in order to model the signalling channel. The theoretical premise of the model is that interventions convey signals that communicate information about the exchange rate objectives of the central bank. The model is used to analyse the impact of Japanese FX interventions during the period 1999–2011 on the yen/US dollar dynamics. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Yu-Fu Chen & Michael Funke & Nicole Glanemann, 2014. "The Signalling Channel of Central Bank Interventions: Modelling the Yen/US Dollar Exchange Rate," Open Economies Review, Springer, vol. 25(2), pages 311-336, April.
    • Handle: RePEc:kap:openec:v:25:y:2014:i:2:p:311-336
    DOI: 10.1007/s11079-013-9280-x
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11079-013-9280-x
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11079-013-9280-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hall, Yosuke & Kim, Suk-Joong, 2009. "What drives Yen interventions in Tokyo?: Do off-shore foreign exchange markets matter more than Tokyo market?," Pacific-Basin Finance Journal, Elsevier, vol. 17(2), pages 175-188, April.
    2. Bhattacharya, Utpal & Weller, Paul, 1997. "The advantage to hiding one's hand: Speculation and central bank intervention in the foreign exchange market," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 251-277, July.
    3. Chen Yu-Fu & Funke Michael & Glanemann Nicole, 2013. "Off-the-record target zones: theory with an application to Hong Kong’s currency board," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(4), pages 373-393, September.
    4. Jacob A. Frenkel & Morris Goldstein, 2017. "A Guide to Target Zones," World Scientific Book Chapters, in: TRADE CURRENCIES AND FINANCE, chapter 5, pages 165-206, World Scientific Publishing Co. Pte. Ltd..
    5. Soderlind, Paul & Svensson, Lars, 1997. "New techniques to extract market expectations from financial instruments," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 383-429, October.
    6. Fabian Reeves, Silke, 1998. "Partial Credibility, Information Selection and the Signalling Channel of Sterilized Interventions," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 13, pages 108-130.
    7. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
    8. repec:zbw:bofitp:2010_006 is not listed on IDEAS
    9. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
    10. Lukas Menkhoff, 2010. "High‐Frequency Analysis Of Foreign Exchange Interventions: What Do We Learn?," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 85-112, February.
    11. Baillie, Richard T. & Humpage, Owen F. & Osterberg, William P., 2000. "Intervention from an information perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 407-421, December.
    12. Iannizzotto, Matteo & Taylor, Mark P, 1999. "The Target Zone Model, Non-linearity and Mean Reversion: Is the Honeymoon Really Over?," Economic Journal, Royal Economic Society, vol. 109(454), pages 96-110, March.
    13. Froot, Kenneth A. & Obstfeld, Maurice, 1991. "Exchange-rate dynamics under stochastic regime shifts : A unified approach," Journal of International Economics, Elsevier, vol. 31(3-4), pages 203-229, November.
    14. Fratzscher, Marcel, 2008. "Communication and exchange rate policy," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1651-1672, December.
    15. Kathryn M. E. Dominguez & Freyan Panthaki, 2007. "The influence of actual and unrequited interventions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 171-200.
    16. Cheung, Yin-Wong & Chinn, Menzie David, 2001. "Currency traders and exchange rate dynamics: a survey of the US market," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 439-471, August.
    17. Krugman,Paul & Miller,Marcus (ed.), 1992. "Exchange Rate Targets and Currency Bands," Cambridge Books, Cambridge University Press, number 9780521435260, September.
    18. Menkhoff, L., 1998. "The noise trading approach -- questionnaire evidence from foreign exchange," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 547-564, June.
    19. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    20. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(3), pages 669-682.
    21. Kristian Stegenborg Larsen & Michael Sørensen, 2007. "Diffusion Models For Exchange Rates In A Target Zone," Mathematical Finance, Wiley Blackwell, vol. 17(2), pages 285-306, April.
    22. Ito, Takatoshi & Yabu, Tomoyoshi, 2007. "What prompts Japan to intervene in the Forex market? A new approach to a reaction function," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 193-212, March.
    23. Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1.
    24. Klein, Michael W., 1992. "Big effects of small interventions: The informational role of intervention in exchange rate policy," European Economic Review, Elsevier, vol. 36(4), pages 915-924, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chen Yu-Fu & Funke Michael & Glanemann Nicole, 2013. "Off-the-record target zones: theory with an application to Hong Kong’s currency board," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(4), pages 373-393, September.
    2. Smita Roy Trivedi & P. G. Apte, 2016. "Central Bank Intervention in USD/INR Market: Estimating Its Reaction Function and Impact on Volatility," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 23(3), pages 263-279, September.
    3. Emilian DOBRESCU, 2016. "Controversies over the Size of the Public Budget," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 5-34, December.
    4. Smita Roy Trivedi, 2020. "The Moses effect: can central banks really guide foreign exchange markets?," Empirical Economics, Springer, vol. 58(6), pages 2837-2865, June.
    5. Mustapha A. Akinkunmi, 2017. "Rebound Effects of Exchange Rate and Central Bank Interventions in Selected ECOWAS Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 489-500.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    2. Yu‐Fu Chen & Michael Funke & Richhild Moessner, 2018. "Informal one‐sided target zone model and the Swiss franc," Review of International Economics, Wiley Blackwell, vol. 26(5), pages 1130-1153, November.
    3. King, Michael R. & Osler, Carol L. & Rime, Dagfinn, 2013. "The market microstructure approach to foreign exchange: Looking back and looking forward," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 95-119.
    4. Vajanne, Laura, . "The Exchange Rate Under Target Zones," ETLA A, The Research Institute of the Finnish Economy, number 16, June.
    5. Bauer, Christian & De Grauwe, Paul & Reitz, Stefan, 2009. "Exchange rate dynamics in a target zone--A heterogeneous expectations approach," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 329-344, February.
    6. Bartolini, Leonardo & Prati, Alessandro, 1999. "Soft exchange rate bands and speculative attacks: theory, and evidence from the ERM since August 1993," Journal of International Economics, Elsevier, vol. 49(1), pages 1-29, October.
    7. Gnabo, Jean-Yves & Laurent, Sébastien & Lecourt, Christelle, 2009. "Does transparency in central bank intervention policy bring noise to the FX market?: The case of the Bank of Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 94-111, February.
    8. Lo, C.F. & Hui, C.H. & Fong, T. & Chu, S.W., 2015. "A quasi-bounded target zone model — Theory and application to Hong Kong dollar," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 1-17.
    9. Hui, Cho-Hoi & Lo, Chi-Fai & Fong, Tom Pak-Wing, 2016. "Swiss franc's one-sided target zone during 2011–2015," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 54-67.
    10. Beine, Michel & Janssen, Gust & Lecourt, Christelle, 2009. "Should central bankers talk to the foreign exchange markets?," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 776-803, September.
    11. C. H. Hui & C. F. Lo & T. Fong, 2015. "A Quasi-Bounded Model for Swiss Franc's One-Sided Target Zone During 2011-2015," Working Papers 152015, Hong Kong Institute for Monetary Research.
    12. Chen Yu-Fu & Funke Michael & Glanemann Nicole, 2013. "Off-the-record target zones: theory with an application to Hong Kong’s currency board," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(4), pages 373-393, September.
    13. Mark Trede & Bernd Wilfling, 2007. "Estimating exchange rate dynamics with diffusion processes: an application to Greek EMU data," Empirical Economics, Springer, vol. 33(1), pages 23-39, July.
    14. Koedijk, Kees G. & Mizrach, Bruce & Stork, Philip A. & de Vries, Casper G., 1995. "New evidence on the effectiveness of foreign exchange market intervention," European Economic Review, Elsevier, vol. 39(3-4), pages 501-508, April.
    15. Lewis, Karen K, 1996. "Stochastic Regime Switching and Stabilizing Policies within Regimes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(2), pages 71-85, April.
    16. Beine, Michel & Benassy-Quere, Agnes & MacDonald, Ronald, 2007. "The impact of central bank intervention on exchange-rate forecast heterogeneity," Journal of the Japanese and International Economies, Elsevier, vol. 21(1), pages 38-63, March.
    17. Hertrich Markus, 2016. "The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone," Review of Economics, De Gruyter, vol. 67(1), pages 91-120, May.
    18. Taylor, Mark P. & Iannizzotto, Matteo, 2001. "On the mean-reverting properties of target zone exchange rates: a cautionary note," Economics Letters, Elsevier, vol. 71(1), pages 117-129, April.
    19. Beine, Michel & Bernal, Oscar & Gnabo, Jean-Yves & Lecourt, Christelle, 2009. "Intervention policy of the BoJ: A unified approach," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 904-913, May.
    20. Rasmus Fatum, 2009. "Official Japanese Intervention in the JPY/USD Exchange Rate Market: Is It Effective, and through Which Channel Does It Work?," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 27(1), pages 75-98, November.

    More about this item

    Keywords

    Exchange rates; Interventions; Japan; C61; E58; F31;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:openec:v:25:y:2014:i:2:p:311-336. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.