Rules versus Discretion in Foreign Exchange Intervention: Evidence from Official Bank of Canada High-Frequency Data

Rasmus Fatum and Michael King

No 05-06, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: This paper analyzes official, high-frequency Bank of Canada intervention and exchange rate data (the latter quoted at the end of every 5-minute interval over every 24-hour period) over the January 1995 to September 1998 time-period. The data is of particular interest as it spans over two distinctly different intervention regimes – one characterized by purely rules-based (“mechanistic”) intervention versus one characterized by both rules-based and discretionary intervention. This unique feature of the data allows for both a comparison of the effects of rules-based version discretionary intervention and a general investigation of intraday effects of intervention. Employing an event-study methodology and three different criteria for success, the study presents strong evidence showing that intervention systematically affects movements in the CAD/USD and in the desired direction along with some evidence that intervention is associated with a reduction of exchange rate volatility. Interestingly, there is no indication that discretionary intervention is more effective than rules-based intervention.

Keywords: foreign exchange intervention; intraday data; event studies; currency co-movement (search for similar items in EconPapers)
JEL-codes: E58 F31 G14 G15 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2005-05
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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