The Impact of a Central Bank's Bond Market Intervention on Foreign Exchange Rates

Robert Jarrow () and Hao Li ()
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Hao Li: Johnson Graduate School of Management, Cornell University, Ithaca, NY, 14853, USA

Quarterly Journal of Finance (QJF), 2015, vol. 05, issue 02, 1-34

Abstract: This paper provides a framework to analyze the effect of a central bank's bond market intervention on foreign exchange rates. Using this framework, we quantify the impact of the Federal Reserve's 2008–2011 quantitative easing (QE) program on the USD/JPY exchange rate. We find that the Fed's QE accounts for a significant portion of the dollar's depreciation during this period. A central monetary authority can affect exchange rates in two ways, either directly by intervening in foreign exchange markets or indirectly by affecting interest rates. Our analysis emphasizes the importance of the indirect channel when a central bank undertakes large scale asset purchases.

Keywords: Quantitative easing; foreign exchange rate; the term structure of interest rates; arbitrage-free models; large trader; quantity impact on price; large scale asset purchases (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S2010139215500093

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