A New Method for Identifying the Effects of Foreign Exchange Interventions

Chih-nan Chen, Tsutomu Watanabe and Tomoyoshi Yabu
Additional contact information
Chih-nan Chen: Research Analyst, Center for Multicultural Mental Health Research, Harvard University (cchen@chareresearch.org)
Tsutomu Watanabe: Institute of Economic Research and Research Center for Price Dynamics, Hitotsubashi University (E-mail: tsutomu.w@srv.cc.hit-u.ac.jp)

No 09-E-06, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: The monetary authorities react even to intraday changes in the exchange rate; however, in most cases, intervention data is available only at a daily frequency. This temporal aggregation makes it difficult to identify the effects of interventions on the exchange rate. We propose a new method based on Markov Chain Monte Carlo simulations to cope with this endogeneity problem: We use "data augmentation" to obtain intraday intervention amounts and then estimate the efficacy of interventions using the augmented data. Applying this method to Japanese data, we find that an intervention of one trillion yen moves the yen/dollar rate by 1.7 percent, which is more than twice as large as the magnitude reported in previous studies applying OLS to daily observations. This shows the quantitative importance of the endogeneity problem due to temporal aggregation.

Keywords: Foreign exchange intervention; Intraday data; Markov-chain Monte Carlo method; Endogeneity problem; Temporal aggregation (search for similar items in EconPapers)
JEL-codes: C11 C22 F31 F37 (search for similar items in EconPapers)
Date: 2009-02
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ifn and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: A New Method for Identifying the Effects of Foreign Exchange Interventions (2012)
Journal Article: A New Method for Identifying the Effects of Foreign Exchange Interventions (2012)
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