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Central bank intervention and foreign exchange markets

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  • Dave Seerattan
  • Nicola Spagnolo

Abstract

In this article we examine the sensitivity of the foreign exchange market to central bank intervention. Using a time varying Markov switching model we separate periods of relatively stable market conditions from volatile periods and look at the dynamic of the causality effect under different market conditions. The analysis is conducted for three developing markets, namely Croatia, Iceland and Jamaica and one developed market, Australia, for comparative purposes. We show that direct intervention affects the probability of switching between states in the developed market but has little or no effect in the developing markets reviewed. We argue that this is due to specific intervention practices rather than market characteristics. Additionally, we find that intervention purchases and sales tend to have different effects. Monetary policy is also found to impact the probability of transitioning from one market state to another, sometimes detracting from the strength of the influence of direct intervention on the transition probabilities.

Suggested Citation

  • Dave Seerattan & Nicola Spagnolo, 2009. "Central bank intervention and foreign exchange markets," Applied Financial Economics, Taylor & Francis Journals, vol. 19(17), pages 1417-1432.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:17:p:1417-1432
    DOI: 10.1080/00036840902817789
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    References listed on IDEAS

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    1. Fatum, Rasmus, 2000. "On the effectiveness of sterilized foreign exchange intervention," Working Paper Series 10, European Central Bank.
    2. Michael M. Hutchison, 2003. "Is official foreign exchange intervention effective?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jul18.
    3. Edison, H.J., 1993. "The Effectiveness of Central-Bank Intervention: A Survey of the Litterature after 1982," Princeton Studies in International Economics 18, International Economics Section, Departement of Economics Princeton University,.
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