Evaluating Foreign Exchange Market Intervention: Self-selection, Counterfactuals and Average Treatment Effects

Rasmus Fatum and Michael Hutchison

No 22008, Working Papers from Hong Kong Institute for Monetary Research

Abstract: Estimating the effect of official foreign exchange market intervention is complicated by the fact that intervention at any point entails a self-selection choice made by the authorities and that no counterfactual is observed. To address these issues, we estimate the counterfactual exchange rate movement in the absence of intervention by introducing the method of propensity score matching to estimate the average treatment effect (ATE) of intervention. To derive the propensity scores we introduce a new intervention reaction function that includes the difference between market expectations and official announcements of macroeconomic developments that can influence the decision to intervene. We estimate the ATE for daily official intervention in Japan over the January 1999 to March 2004 period. This sample encompasses a remarkable variation in intervention frequencies as well as unprecedented frequent intervention towards the latter part of the period. We find that the effects of intervention vary dramatically and inversely with the frequency of intervention: Intervention is effective over the 1999 to 2002 period and ineffective (or possibly counterproductive) during 2003 and 2004. These results hold up to a variety of robustness tests. Only sporadic and relatively infrequent intervention appears to be effective.

Keywords: Foreign Exchange Intervention; Bank of Japan; Self-Selection; Matching Methods (search for similar items in EconPapers)
JEL-codes: E58 F31 G15 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2008-02
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Evaluating foreign exchange market intervention: Self-selection, counterfactuals and average treatment effects (2010)
Working Paper: Evaluating Foreign Exchange Market Intervention: Self-Selection, Counterfactuals and Average Treatment Effects (2006)
Working Paper: Evaluating Foreign Exchange Market Intervention: Self-Selection, Counterfactuals and Average Treatment Effects (2006)
Working Paper: Evaluating Foreign Exchange Market Intervention: Self-Selection, Counterfactuals and Average Treatment Effects (2006)
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