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Does central bank intervention stabilize foreign exchange rates?
Since the adoption of a flexible exchange rate system in 1973, central banks of most industrialized countries have continued to intervene in foreign exchange markets. One reason is that exchange rate volatility has increased. To reduce volatility, many European countries have agreed to keep exchange rates within a band around a target exchange rate, implementing this policy by intervening in foreign exchange markets when necessary. Even without an explicit exchange rate commitment, countries such as the United States and Japan have intervened in foreign exchange markets to help stabilize exchange rates.> Opinions differ on whether central banks can stabilize exchange rates. Some analysts believe central bank intervention can reduce exchange rate volatility by stopping speculative attacks against a currency. Other analysts, though, believe central bank intervention may increase volatility if the intervention contributes to market uncertainty or encourages speculative attacks against the currency.> Bonser-Neal presents empirical evidence on this controversy. Her evidence suggests that central bank intervention does not generally reduce exchange rate volatility. Rather, central bank intervention typically appears to have had little effect on volatility.
AUTHORS: Bonser-Neal, Catherine
Central bank intervention and the volatility of foreign exchange rates: evidence from the options market
This paper tests the effects of central bank intervention on the ex ante volatility of $/DM and $/Yen exchange rates. In contrast to previous research which employed GARCH estimates of conditional volatility, we estimate ex ante volatility using the implied volatilities of currency options prices. We also control for the effects of other macroeconomic announcements. We find little support for the hypothesis that central bank intervention decreased expected exchange rate volatility between 1985 and 1991. Federal Reserve intervention was generally associated with a positive change in exante $/DM and $/Yen volatility, or with no change. Perceived Bundesbank intervention did not alter $/DM ex ante volatility in any of the periods, while perceived Bank of Japan intervention was associated with positive changes in ex ante $/Yen volatility during the 1985-91 period as a whole and during the February 1987 to December 1989 post-Louvre Accord subperiod.
AUTHORS: Bonser-Neal, Catherine; Tanner, Glenn
Monetary actions, intervention, and exchange rates : a re-examination of the empirical relationships using federal funds rate target data
The results of recent empirical studies on the relationships among Federal Reserve monetary-policy actions, U.S. interventions in currency markets, and exchange rates are re-examined. Changes in the Federal Reserve's federal funds rate target as measure of monetary-policy actions are used. Then the relations using federal funds rate target changes only in periods in which the Federal Reserve used the federal funds rate to implement monetary policy are estimated. The results suggest that the immediate responses of exchange rates to U.S. monetary policy actions are statistically and economically significant in a majority of cases. This result differs from those reported recently using VAR methodologies. Moreover, when the spot and forward exchange-rate responses are combined, the authors were not able to reject the overshooting hypothesis in seven of eight instances. In contrast, recent VAR studies estimate exchange-rate response patterns inconsistent with overshooting. The interaction between U.S. interventions and Federal Reserve monetary policy actions are also re-examined. In this case, results consistent with recent studies were obtained. In particular, the authors cannot reject either the policy-signaling or the leaning-against-the-wind hypotheses of intervention effects. Finally, it was found by the authors that the estimates of exchange-rate responses to federal funds rate target changes are virtually unaffected when they control for central-bank interventions.
AUTHORS: Bonser-Neal, Catherine; Roley, V. Vance; Sellon, Gordon H.
The effect of monetary policy actions on exchange rates under interest-rate targeting
One puzzling feature of recent empirical studies of the effects of monetary policy changes on exchange rates is the result that the exchange rate does not adjust immediately to the policy shock. Instead, these studies find that it can take as long as two years for the exchange rate to fully reflect the policy change. In this paper, a model of the exchange-rate response to U.S. monetary policy actions which captures these results is specified. This model is also capable of generating standard overshooting results. The authors show that the response pattern of spot and expected future exchange rates depends on the predictability of Federal Reserve actions, the persistence of shocks to the economy, and the reaction of foreign central banks to the U.S. monetary policy shock.
AUTHORS: Sellon, Gordon H.; Roley, V. Vance; Bonser-Neal, Catherine
Does financial market development stimulate savings? Evidence from emerging market stock markets
This paper examines the empirical relation between financial market development, as measured by the stock market, and gross private savings rates in 16 emerging markets over 1982-1993. With data from all 16 countries, there is evidence of a significant positive relation between savings and stock market size and liquidity. When countries with outlying values for the stock market measures are excluded, however, all significance disappears. The results suggest that we should not assume that a growing or deepening stock market will necessarily be associated with higher savings rates.
AUTHORS: Bonser-Neal, Catherine; Dewenter, Kathryn L.
Are Japanese interest rates too stable?
AUTHORS: Roley, V. Vance; Bonser-Neal, Catherine
Transaction costs in an emerging market: the case of Indonesia
Despite the dramatic increase in the flow of funds to emerging stock markets, relatively little is known about the cost of transacting on these markets. This paper estimates the execution costs of trading on a representative emerging market stock exchange, the Jakarta Stock Exchange (JSX). We find that execution costs are affected by the difficulty of the trade, the size of the firm traded, and the broker executing the trade. Surprisingly, we find that execution costs on the JSX are only modestly higher than average execution costs in several non-U.S. developed stock markets. In addition, we find that trades initiated by foreigners have a much larger impact on the price than trades initiated by local investors. Since the impact is not reversed following the trade, this raises the possibility that foreign trades may signal future investment flows.
AUTHORS: Neal, Robert; Bonser-Neal, Catherine; Linnan, David
Does the yield spread predict real economic activity? : a multicountry analysis
This article evaluates the ability of the yield spread to forecast real economic activity in 11 industrial countries. The first section of this article defines the yield spread and explains why the spread may be a useful predictor of real economic activity. The second section describes the data and criteria used to evaluate the predictive power of the yield spread. The third section examines whether yield spreads have reliably forecast real economic activity in the 11 countries, using several measures of real economic activity and alternative forecast horizons. The empirical results indicate the yield spread is a statistically and economically significant predictor of real economic activity in several industrial countries besides the United States. In addition, the yield spread forecasting model generally outperforms two alternative forecasting models in predicting future real GDP growth.
AUTHORS: Morley, Timothy R.; Bonser-Neal, Catherine