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The Dynamic Impact of FX Interventions on Financial Markets

Lukas Menkhoff, Malte Rieth () and Tobias Stöhr
Authors registered in the RePEc Author Service: Tobias Heidland

No 1854, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Evidence on the effectiveness of FX interventions is either limited to short horizons or hampered by debatable identification. We address these limitations by identifying a structural vector autoregressive model for the daily frequency with an external instrument. Generally, we find, for freely floating currencies, that FX intervention shocks significantly affect exchange rates and that this impact persists for months. The signaling channel dominates the portfolio channel. Moreover, interest rates tend to fall in response to sales of the domestic currency, whereas stock prices of large (exporting) firms increase after devaluation of the domestic currency.

Keywords: Foreign exchange intervention; structural VAR; exchange rates; interest rates; stock prices (search for similar items in EconPapers)
JEL-codes: E58 F31 F33 (search for similar items in EconPapers)
Pages: 62 p.
Date: 2020
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-mon
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Related works:
Journal Article: The Dynamic Impact of FX Interventions on Financial Markets (2021) Downloads
Working Paper: The dynamic impact of FX interventions on financial markets (2020) Downloads
Working Paper: The Dynamic Impact of FX Interventions on Financial Markets (2019) Downloads
Working Paper: The dynamic impact of FX interventions on financial markets (2019) Downloads
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