Edited by Klaus Liebscher, Josef Christl, Peter Mooslechner and Doris Ritzberger-Grünwald
Chapter 12: How do Central Banks and FX Traders Interact?
Antonio Scalia1 INTRODUCTION 12.1 The purpose of this contribution is to comment2 on Chapter 10 (‘The impact of exchange rate interventions and communication over the medium term’ by Marcel Fratzscher) and Chapter 11 (‘Using the microstructure approach to foreign exchange markets in a central bank’ by Áron Gereben) and to complement their ﬁndings with my own research conducted for the Czech Republic. Although Chapters 10 and 11 adopt diﬀerent approaches, they share a common interest in the market interaction between central banks and foreign exchange (FX) traders, a theme that has clear implications for the monetary authorities. My key point is as follows: the results on the eﬀectiveness of intervention for the major central banks should not be extrapolated as a guide for future actions in the market of currencies with limited liquidity. Communication may not be as successful, particularly if the economy is in transition and the monetary authorities face the associated special challenges. On the other hand, the small scale of the market is such that the impact of order ﬂow on price is bigger, and this has important implications for the monitoring activity of the central bank as well as for possible, direct market intervention. The next section presents my discussion of the chapters by Fratzscher and Gereben. The third section shows some results on intervention eﬀectiveness in the case of a currency with limited liquidity, namely the Czech koruna (CZK). The fourth describes the stylized facts about the microstructure of the foreign exchange...
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