Edited by Klaus Liebscher, Josef Christl, Peter Mooslechner and Doris Ritzberger-Grünwald
Chapter 10: The Impact of Exchange Rate Interventions and Communication Over the Medium Term
Marcel Fratzscher1 INTRODUCTION 10.1 Since the mid-1980s, some monetary authorities, such as those in Japan, have periodically conducted substantial purchases or sales in FX markets, often supported by ‘oral interventions’. Others, such as the US and euro area authorities, basically abandoned direct market interventions in the mid-1990s and have since relied on communication as their primary policy tool to aﬀect exchange rates. Assessing the success of those diﬀerent routes, the literature on FX market interventions has found mixed and partly supportive evidence that FX purchases and sales may help move currencies in the desired direction (for example, Edison, 1993; Sarno and Taylor, 2001). More recently, policy makers (Rubin and Weisberg, 2003) have argued and academic research (for example, Fratzscher, 2004; Jansen and de Haan, 2005) has found that communication may have a signiﬁcant impact on exchange rates. The literature on the role of communication, while still in its infancy, constitutes a ﬁrst step towards understanding appropriate monetary policy design. Two important questions arise from the literature that have not been answered conclusively yet. First, through which channels do oral and actual interventions aﬀect exchange rate developments? Second, how eﬀective are such interventions in the longer term? From a conceptual perspective, interventions may aﬀect exchange rates through three channels. First, through the portfolio balance channel: FX purchases or sales by a monetary authority alter the relative supply and demand of domestic versus foreign assets, thus altering the exchange rate even given sterilized interventions due to...
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