EconPapers    
Economics at your fingertips  
 

What Prompts Japan to Intervene in the Forex Market? A New Approach to a Reaction Function

Takatoshi Ito () and Tomoyoshi Yabu ()

No 10456, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper analyzes and estimates the reaction function of the Japanese monetary authorities in deciding when to intervene in the foreign exchange (forex) markets, using daily Japanese intervention data from April 1, 1991 to December 31, 2002. This paper is the first in estimating the reaction function of the monetary authorities in the forex market intervention with following new methods. First, a theoretical friction model is presented to describe the intervention as cost-minimizing behavior. Second, the ordered probit analysis, which is consistent with the theoretical model, was carried out to predict authorities' reaction function. The regime change from frequent, small-size intervention before June 1995 and infrequent, large-size intervention after June 1995 is established and estimations are conducted for two different regimes separately. Third, a noise-to-signal ratio is applied in selecting the optimal cutoff point in estimated ordered probit function to use the model for predicting interventions. Major findings are as follows: (1) There was a regime change in June 1995 from small-scale frequent interventions to large-scale infrequent interventions; (2) the first half of the sample period had lower friction costs than the second half of the sample period; (3) Judging from the model and data, the optimum cutoff was higher in the first half than the second half.

JEL-codes: E58 F31 (search for similar items in EconPapers)
Date: 2004-05
New Economics Papers: this item is included in nep-dcm, nep-ifn, nep-mon and nep-sea
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40) Track citations by RSS feed

Published as Ito, Takatoshi & Yabu, Tomoyoshi, 2007. "What prompts Japan to intervene in the Forex market? A new approach to a reaction function," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 193-212, March.

Downloads: (external link)
http://www.nber.org/papers/w10456.pdf (application/pdf)

Related works:
Journal Article: What prompts Japan to intervene in the Forex market? A new approach to a reaction function (2007) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:10456

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w10456

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2021-09-07
Handle: RePEc:nbr:nberwo:10456