Real-Time Effects of Central Bank Interventions in the Euro Market

Rasmus Fatum and Jesper Pedersen
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Jesper Pedersen: Department of Economics, University of Copenhagen

No 07-01, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: This paper investigates the real-time effects of foreign exchange intervention using official intraday intervention data provided by the Danish central bank. Denmark is currently pursuing an active intervention policy under the provisions of the Exchange Rate Mechanism (ERM II) and intervenes on a discretionary basis when considered necessary. Prior participation in ERM II is a requirement for adoption of the Euro. Therefore, our study is of particular relevance for the new European Union member states that are either currently participating in ERM II or expected to do so at a later date as well as for Denmark. Our analysis employs the two-step weighted least squares estimation procedure of Andersen, Bollerslev, Diebold and Vega (2003) and an array of robustness tests. We find that intervention exerts a statistically and economically significant influence on exchange rate returns when the direction of intervention is consistent with fundamentals and intervention is carried out during a period of high exchange rate volatility. We also show that the exchange rate does not adjust instantaneously to the unannounced and discretionary interventions under study. We conclude that intervention can be an important short-term policy instrument for exchange rate management.

Keywords: foreign exchange intervention; intraday data; ERM II (search for similar items in EconPapers)
JEL-codes: D53 E58 F31 G15 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2007-03
New Economics Papers: this item is included in nep-cba, nep-eec, nep-ifn, nep-mac, nep-mon and nep-mst
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Real-time effects of central bank intervention in the euro market (2009)
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