Journal Article

Foreign exchange intervention as a signal of monetary policy

Abstract: Recent experience with exchange rate management has rekindled interest in the efficacy of foreign exchange intervention. While there is broad evidence that sterilized intervention has no effect on the exchange rate through a portfolio balance channel, less evidence exists on the signalling role of intervention. This article considers the signalling role of intervention for the United States and West Germany between the 1985 Plaza Accord and the October 1987 stock market crash. ; An examination of the data shows that intervention observed by the foreign exchange market did not precede changes in monetary policy in a proximate or consistent fashion. Thus the study concludes that, after the fact, intervention was not a signal of subsequent monetary policy. The study also explores the possibility that during this period participants in the foreign exchange market viewed intervention as a signal. While the daily response of the change in the deutsche mark/dollar exchange rate showed a significant effect of intervention in the early part of this sample period, the effect eroded over time as monetary authorities failed to back up intervention with monetary policy.

Keywords: Foreign exchange - Law and legislation; Monetary policy;

Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: New England Economic Review

Publication Date: 1991

Issue: May

Pages: 39-50