Foreign Exchange Intervention When Interest Rates Are Zero: Does the Portfolio Balance Channel Matter After All?
No 2010-07, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics
The Japanese zero-interest rate period provides a “natural experiment” for investigating the effectiveness and transmission channels of sterilized intervention when traditional monetary policy options are constrained. This paper takes advantage of the fact that all interventions in the JPY/USD market during the zero-interest rate period are sterilized sales of JPY and, therefore, none of these interventions can signal a future interest rate decrease. In order to further assess through which transmission channel these interventions work, the analysis integrates official daily Japanese intervention data with a comprehensive set of rumors data that capture interventions of which the market is aware. Market awareness is a necessary condition for intervention to disseminate information and work through channels other than the portfolio balance channel. The results of the time series analysis show that intervention, on average, induces a statistically and economically significant same-day depreciation of the JPY. Market awareness is shown to be unimportant. Consequently, the effects of Japanese interventions during the zero-interest rate period are consistent only with the portfolio balance channel. This is a remarkable finding, demonstrating that sterilized intervention is, in principle, an independent policy instrument.
Keywords: exchange rates; foreign exchange market intervention; channels of transmission (search for similar items in EconPapers)
JEL-codes: E52 F31 G14 (search for similar items in EconPapers)
Pages: 21 pages
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://web.econ.ku.dk/eprn_epru/Workings_Papers/wp-10-07.pdf [301 Moved permanently]--> https://web.econ.ku.dk/eprn_epru/Workings_Papers/wp-10-07.pdf)
Journal Article: Foreign exchange intervention when interest rates are zero: Does the portfolio balance channel matter after all? (2015)
Working Paper: Foreign exchange intervention when interest rates are zero: does the portfolio balance channel matter after all? (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:kud:epruwp:10-07
Access Statistics for this paper
More papers in EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics ï¿½ster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark. Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Hoffmann ().