Central bank intervention and foreign exchange volatility

K. Doroodian and Tony Caporale

International Advances in Economic Research, 2001, vol. 7, issue 4, 385-392

Abstract: This paper provides additional empirical evidence on the topic of the effectiveness and the impact of Federal Reserve intervention on U.S. exchange rates. Using a daily measure of exchange rate intervention in the yen/dollar and mark/dollar exchange markets for the period January 3, 1985 to March 19, 1997, this paper finds a statistically significant impact of intervention on spot rates. A generalized autoregressive conditional heteroskedasticity exchange rate equation is used to measure the impact of intervention on exchange rate uncertainty. This study finds that intervention is associated with a significant increase in the interday conditional variance (uncertainty) of both bilateral spot exchange rates. This supports the view of Friedman and Schwartz that exchange rate intervention serves to destabilize the foreign exchange market by introducing additional levels of exchange rate uncertainty. Copyright International Atlantic Economic Society 2001

Date: 2001
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DOI: 10.1007/BF02295768

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