Market Responses To Coordinated Central Bank Intervention
Kathryn M. Dominguez
The scale of unilateral and coordinated intervention in the foreign
exchange market by the G-5 countries has become considerably larger over
the last few years, following a period in which official U.S. policy was
opposed to intervention. This paper examines market responses to official
sterilized central bank intervention policy over the period 1985 through 1987.
The efficacy of sterilized intervention is hypothesized to depend on the
market's belief that central banks both have "inside" information about future
monetary policy and the incentive to reveal that information truthfully through
intervention signals. Central banks may agree to coordinate their intervention
operations in order to influence the market's perception of the relative
importance and credibility of own signals. Market responses to intervention
over the period 1985 through 1987 are examined econometrically using heretofore
unavailable daily data on G-3 unilateral and coordinated intervention
operations. The empirical evidence indicates that: (1) even though daily
intervention data are not published, market participants were generally able to
comtemporaneously observe the source and magnitude of central bank intervention
operations, (2) unilateral intervention significantly influenced market
expectations in some periods, and (3) coordinated intervention had a
significantly different and longer-term influence on market expectations than
did unilateral intervention over the three year period examined.
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