Working Paper

New results on the impact of central-bank intervention on deviations from uncovered interest parity

Abstract: Germany, Japan, and the United States continue to view foreign exchange intervention as an effective instrument, although the mechanism through which it operates is unclear. In this paper, we use official data on daily dollar intervention to examine its impact on exchange-rate risk premia through both the portfolio-balance and expectations channels. We define the risk premium in terms of deviation from uncovered interest parity and model its behavior using generalized autoregressive conditional heteroscedasticity. Our evidence of portfolio-balance and expectations effects is inconsistent across subperiods of different exchange-rate-policy regimes. Also, unlike Dominguez (1990) and Loopesko (1984), we find no evidence that coordination of intervention improves its efficacy.

Keywords: Foreign exchange - Law and legislation;

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 1992

Number: 9207