The impact of foreign exchange interventions: new evidence from FIGARCH estimations
We investigate the impact of official intervention on the short run dynamics of the Deutschemark and the yen against the US dollar. To this goal, we rely on a FIGARCH model of the exchange rate dynamics, which yields a more appropriate measure of the ex post volatility of the exchange rates than the GARCH model. Indeed, the FIGARCH model implies a finite persistence of volatility shocks (while there is no persistence in the GARCH framework), and is strongly supported by the data. We use daily data on nominal exchange rates and on foreign exchange interventions as released by the Federal Reserve and the Bundesbank over 1985-1995. Following Bonser- Neal and Tanner (1996) and Dominguez (1998), we compare these data with press reports, in order to distinguish "secrete" from "reported" interventions, and to perform estimations for the yen/dollar exchange rate despite the lack of official data. We also test for the impact of coordinated interventions, i.e. interventions carried out by several central banks simultaneously. As a whole, the results show that official interventions manage to move the market (especially when they are reported in the press), but often in the wrong direction: official purchases of dollars increase exchange rate volatility and generally induce a dollar depreciation. These findings are mostly in line with the existing literature. Further investigations show that they do not stem from reverse causality, although central banks clearly lean against the wind.
Exchange rates; official interventions; FIGARCH models
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