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Working Paper
The mirage of fixed exchange rates
This paper discusses the profound difficulties of maintaining fixed exchange rates in a world of expanding global capital markets. Contrary to popular wisdom, industrialized-country monetary authorities easily have the resources to defend exchange parities against virtually any private speculative attack. But if their commitment to use those resources lacks credibility with markets, the costs to the broader economy of defending an exchange-rate peg can be very high. The dynamic interplay between credibility and commitment is illustrated by the 1992 Swedish and British crises.
Working Paper
Effectiveness of official daily foreign exchange market intervention operations in Japan
Japanese official intervention in the foreign exchange market is of by far the largest magnitude in the world, despite little or no evidence that it is effective in moving exchange rates. Up until recently, however, official data on intervention has not been available for Japan. This paper investigates the effectiveness of intervention using recently published official daily data and an event study methodology. The event study better fits the stochastic properties of intervention and exchange rate data, i.e. intense and sporadic bursts of intervention activity juxtaposed against a yen/dollar ...
Working Paper
Intervention and the foreign exchange risk premium: an empirical investigation of daily effects
Currency markets have witnessed a sharp increase in government intervention since 1985. Many observers believe that this intervention promoted the dollar's depreciation between 1985 and early 1987, and that intervention has since helped to stabilize dollar exchange rates. This paper tests for a systematic effect of daily dollar intervention on exchange rate risk premia. We test for both portfolio balance effects and signaling influences by using daily data on central bank intervention (in dollars) against both the yen and the West German mark. Following work by Dominguez (1989) and Loopesko ...
Working Paper
New results on the impact of central-bank intervention on deviations from uncovered interest parity
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 ...
Journal Article
Are successful interventions random events?
An examination of the Federal Reserve's intervention successes in the late 1980s, showing that, although the characteristic day-to-day fluctuations in exchange rates virtually ensured that a large share of these interventions would appear successful--purely by chance and even in the absence of a causal link--the number of successes proved larger than pure randomness would suggest.
Working Paper
A dynamic model of export competition, policy coordination and simultaneous currency collapse
This paper offers a game-theoretic interpretation of the recent currency crisis in Asia. Specifically, we argue that the 'price wars during booms' logic of Rotemberg and Saloner (1986) can be used to explain the nearly simultaneous devaluation of several Asian currencies during the summer of 1997. The idea is as follows. Since each of these countries relies heavily on exports to the U.S. pressures for competitive devaluations naturally arise. ; We view the historical tendency of these countries to peg to the dollar as a way to avoid these pressures. However, it must be in the ...
Working Paper
Convertibility risk, default risk, and the Mexdollar anomaly
Rogers (l992a,b) I put forth the convertibility risk hypothesis in order to explain the anomalous n~gative relationship between the expected rate of Mexican peso depreciation and the ratio of Mexdollars to peso denominated demand deposits. Recently, Gruben and Welch (1994) examine the effect of deteriorating bank loan quality on the variables I consider. Using a cointegration framework, the authors find (i) a negative relationship between non-performing loans and the dollarization ratio and (ii) the conventional positive relationship between expected peso depreciation and dollarization. The ...
Journal Article
Lessons from Thailand