Central Bank Independence and the Signaling Effect of Intervention: A Preliminary Exploration

Shinji Takagi and Hiroki Okada ()
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Hiroki Okada: Graduate School of Economics, Osaka University

No 13-04, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This note explores the signaling effect of foreign exchange market intervention in countries, such as Japan, the United Kingdom and the United States, where separate agencies are responsible for intervention and monetary policy. An important part of the signaling effect operates when an entity conducting intervention makes a credible commitment to a change in future monetary policy, suggesting that its effectiveness hinges upon whether the central bank is independent of government oversight. We test this conjecture by comparing the consistency of intervention and future monetary policy in Japan before and after April 1998, when central bank independence was established by the new Bank of Japan Law. As expected, the signaling effect of intervention weakened after the central bank became independent.

Keywords: foreign exchange market intervention; Japanese intervention; central bank independence; signaling effect of intervention (search for similar items in EconPapers)
JEL-codes: E42 F31 F33 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2013-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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