CENTRAL BANK INTERVENTIONS IN INDUSTRIALIZED COUNTRIES:
A CHARACTERIZATION BASED ON SURVEY RESULTS
Christelle LECOURT* , Helene RAYMOND♦
a
CEREFIM, University of Namur, Namur, Belgium.
b
SEGMI, University of Paris X, Nanterre, France.
This version: May 2005
ABSTRACT
This paper presents the findings from a survey on central banks’ FOREX intervention
practices in industrialized countries over the last decade. The answers of responding
monetary authorities are examined in respect of available data and literature. Our
findings indicate that interventions usually take place during normal working hours
while central banks show some preference for dealing with major domestic banks.
Correction or prevention of long-term misalignments of exchange rates with their
fundamental values and, to a lesser extent, the reduction of exchange rate volatility is
the first motive given for intervention. The signalling effect of interventions is
consistently put forward as the main channel through which interventions work.
JEL CODE: F31; C42.
KEY WORDS: Central banks; interventions; exchange rate; survey.
*
Correspondence to: Christelle Lecourt, CEREFIM, University of Namur, 8 Rempart de la Vierge, B5000, Namur, Belgium. E-mail: [email protected].
♦
E-mail: [email protected].
1
1.
INTRODUCTION
The question of the effectiveness of central bank interventions (CBI) has been studied at
length over the last thirty years. The CBI capacity to move the exchange rate is
regularly called into question by the foreign exchange analysts who put forward the
increasing amounts traded on the market. Numerous empirical studies corroborate the
doubt concerning the CBI effectiveness: the main findings are that foreign exchange
interventions seem to increase volatility rather than to reduce it, whereas exchange rate
levels frequently move in the wrong direction.1 The empirical literature has shown
however that the kind of operation conducted in the foreign exchange market is relevant.
Several studies find that interventions done in coordination with other central banks
have a larger impact than unilateral interventions conducted by a single central bank
(see Catte et al., 1994; Beine et al., 2003 or Nagayasu, 2004). Some studies distinguish
between the effects of public interventions reported in the press and the effects of
“secret” interventions (Dominguez and Frankel, 1993; Osterberg and Humes, 1993;
Humpage, 1999, Beine and Lecourt, 2004). Quite recently, the academic literature on
CBI has also turned its attention to the effects of Central Banks’ communication policy.
Several studies conclude that Central Banks’ statements - accompanied or not by actual
interventions - can have a stabilizing effect on the exchange rate (Fatum and
Hutchinson, 2002; Jansen and de Haan, 2003; Beine et al., 2004; Fratzscher, 2004).
Despite the weakness of the evidence supporting the positive effect of
interventions, major central banks continue to stay active on the foreign exchange
market (FOREX), as attested by the very recent and frequent unilateral interventions of
2
the Bank of Japan in recent years, which aimed to weaken the yen against the euro or
the dollar. At this stage, one can only wonder as to what the real central bank
motivations for intervening are: central banks’ aims seem sometimes to be more
complex than simply trying to impact on the current level and volatility of the exchange
rate. Similarly, one wonders to what extent the CBI effectiveness does not depend on
the intervention methods: sterilized or non-sterilized interventions; coordinated or
unilateral interventions, with large or small amounts; reported or secret interventions; at
which frequency and so on.
An obvious possibility for the clarification of the literature on central bank
motivations for and methods of intervening on the FOREX is to interview central banks
on their practices and motives. In this respect, the work of Neely (2001) is the first (and
to the best of our knowledge the only work) that analyses survey data, which was
obtained directly from the central banks.
This survey focuses on several issues: the way in which central banks intervene
(the frequency and the size of interventions, the time of intervention and the market in
which it takes place, the counterparts with whom monetary authorities deal with), the
kinds of intervention (unilateral or coordinated, reported or secret and sterilized or
nonsterilized), the channels through which central banks expect to act on the FOREX,
the aims of the interventions and central banks’ viewpoint on the effectiveness of their
interventions. The examination of central banks’ responses in the light of available data
on interventions as well as existing literature, allows us to draw conclusions on the
characteristics of interventions in the last decade.
3
Our study differs from the survey previously conducted by Neely (2001) in three
respects. Firstly, our sample of responding central banks is different 2 : this study is
focused on the intervention practices of central banks in industrialized countries.3
Secondly, different aspects of the intervention practices that are treated here were not
covered in Neely’s study (2001). These aspects involve questions regarding the amount
of interventions, the channel through which interventions act on the market and the
different means of increasing the effectiveness of interventions. Thirdly, the periods
considered in the two surveys do not quite match. 4
This paper is organized as follows: foreign exchange interventions are defined and
classified in Section 2; Section 3 summarizes the theoretical channels through which
interventions can work; our results and comments are displayed in Section 4 while
Section 5 concludes.
2. DEFINITION OF THE DIFFERENT KINDS OF INTERVENTIONS
Intervention in the foreign exchange market is generally defined as the official purchase
and sale of foreign currencies made by the monetary authorities in order to influence
future currency changes. This definition restricts the motives for which a monetary
authority can intervene. For instance, it could intervene in order to adjust the portfolio
of foreign exchange reserves or to signal its commitment to a new monetary policy. The
primary motive of these kinds of dealings is not to impact on exchange rates dynamics,
even if they do move exchange rates. In our survey (Section 4) we do not exclude these
4
“interventions”, we attempt instead to ascertain if the secrecy of some interventions can
be explained by such motives. Note that we only study direct interventions on the
foreign exchange market, excluding monetary policy changes such as interest
adjustments, even if they were made in order to support an exchange rate target. This
restriction is justified by the difficulty in ensuring that a monetary change was
exclusively designed to reach an exchange rate target. However, as it will be recalled in
the following subsection, exchange rate policy and monetary policy are tightly linked.
2.1
Sterilized versus non-sterilized interventions
The above definition of a direct FOREX intervention can be further refined to
distinguish between sterilized and non-sterilized interventions. In the case of sterilized
interventions, the action of trading reserves is coupled with an adjustment in interest
rates or any monetary instrument enabling the monetary base to be left unchanged. The
sterilization of intervention on the domestic quantity of money implies that the central
bank is implicitly leading an exchange rate policy, while the monetary policy remains
unchanged. In the case of non-sterilized interventions, given that the monetary base is
modified in proportion to the amount of currency reserve trades, the implicit exchange
rate policy is coupled with a change in the monetary policy. This last kind of
intervention should have more lasting effects on exchange rates levels, as the monetary
policy effect strengthens the direct effects of the purchases or sales on the FOREX.
2.2
Unilateral versus concerted interventions
Concerted interventions are interventions carried out simultaneously by two or
more central banks in support of (or against) the same currency. In fixed exchange rate
5
systems, interventions are designed to restore exchange rates to their targets and they
usually imply some coordination between the monetary authorities participating in the
exchange rate agreement. In floating systems, however, central banks are under no
obligation to support an intervention. According to Dominguez and Frankel (1993), a
possible motivation for coordination is therefore the spillover effect of an intervention:
it causes a change in the external value of one currency but also a change in the relative
value of other currencies. If central banks believe that the spillover effect is of
significant
magnitude,
they
have
an
incentive
to
coordinate
their
intervention
operations, which could eventually lead to some coordination in future monetary
policies.
According to empirical findings (Dominguez, 1990; Dominguez and Frankel, 1993;
Catte et al., 1994; Beine et al., 2003; Nagayasu, 2004), coordinated sterilized
interventions are more powerful than non-coordinated interventions in moving the
exchange rate level. The efficiency of coordinated interventions could, besides the
opportunity to intervene for a bigger total amount, be grounded in the signalling effect.
The intervention conveys a signal to the market participants on the forthcoming
monetary policy. If the signalling effect is the major channel through which an
intervention acts, then interventions aimed to support parity should be more effective
when conducted in a concerted manner with other central banks. In that case, signals
sent to the market will be more credible in the sense that “multiple signals will increase
the total amount of inside information conveyed by intervention operations”
(Dominguez and Frankel, 1993, p. 63). It is better for a central bank to use the
6
credibility of other central banks in addition to its own in order to strengthen market
participants’ confidence that the signal is a real one.
2.3
Reported versus secret interventions
Intervention operations are frequently reported in newspapers and on wire
services (e.g., Reuters and Bloomberg) and major domestic banks often participate
directly in the intervention operations (see answers to Question 4 in our survey, reported
in Table 1 in the appendix). Therefore the existence of strictly secret interventions is
questionable; the market generally knows when a central bank is intervening (or
whether a central bank is to intervene in the near future), even though current official
data are unavailable. As a matter of fact, Dominguez (1999), in an empirical paper using
high-frequency data, found that some traders know that a central bank is intervening at
least one hour prior to the public release of the information in newswire reports.
Furthermore, far from trying to keep it a secret after the intervention, a growing number
of central banks release, after some delay, summaries of their official intervention
operations.5
Still, there can be a rationale for keeping some secrecy around the timing and/or
amounts of future intervention operations. Firstly, a central bank may prefer not to
disclose its intervention when it is inconsistent with monetary and fiscal commitments.6
Keeping the intervention secret minimizes its signalling effect and maintains the central
bank’s reputation. Another reason for restricting information is to hide the state of the
exchange reserves. The ability of a central bank to maintain the exchange rate depends
on its available foreign exchange reserves. When a central bank intervenes in order to
7
restore its available reserves, it will prefer to do so secretly so as not to give away
information. Similarly, the secrecy of interventions intended to counter speculative
attacks helps to hide the state of reserves, increases the riskiness of speculation and
assists in having the interventions mistaken for a change in the trend of the market. A
final reason for secrecy is that a central bank can intervene on the behalf of another
central bank. Secrecy can then be required by the second central bank or be preferred by
the intervening central bank to avoid blurring its monetary policy signals.
All the interventions unreported by the media, however, are not necessarily
secret. Secrecy might not be so easy for a central bank to achieve and information leaks
could be voluntary. Baillie et al. (2000) explain that secrecy depends on the central
bank’s counterparts: if the counterpart is a well known commercial bank, then it is
expected to report to the market the fact that the central bank placed an order.7 On the
other hand, if the central bank operates through major foreign banks, brokers or recent
electronic brokerage system (EBS), it is likely that its intervention will not be reported
to the market. The authors, however, point out that the distinction between reported and
secret interventions is not always clear-cut.8
The empirical literature finds evidence that secret intervention generally increases
exchange rate volatility (Dominguez, 1998) or leaves it unchanged (Beine, BénassyQuéré and Lecourt, 2002a), whereas it has no significant effects on the conditional
mean (Dominguez and Frankel, 1993). According to the well-known signalling channel,
it might be difficult to justify the use of secret interventions. This has led to the socalled secret intervention puzzle (Sarno and Taylor, 2001). As a matter of fact, the
8
drawback of secret intervention is that, by maintaining some uncertainty on its future
policies, the central bank may disturb the market rather than calm it down. According to
Beine et al. (2002), secret interventions should, however, convey no signalling effect, as
few agents are aware of secret interventions, these interventions should increase
exchange rate volatility less than reported interventions. On the contrary, Vitale (1999)
argues that the flow of orders itself is a signal, as (in a microstructure framework) it
reveals some of the private information of the central bank, even when the intervention
is kept secret. Recently, some authors like Evans and Lyons (2001) found a certain
amount of support for effective secret interventions, through the portfolio channel
described in the following section.
3. THE THEORETICAL CHANNELS THROUGH WHICH INTERVENTIONS
ACT ON THE EXCHANGE RATE
There are many theories on the scope of foreign exchange rate intervention.9 However,
economic theory identifies mainly three channels through which interventions can act
on the exchange rate: the monetary channel, the portfolio-adjustment channel and the
signalling channel.10
3.1
The monetary channel
The monetary channel involves non-sterilized foreign exchange interventions.11 In
monetary models of exchange rate determination, if purchases (or sales) of foreign
currency assets are not accompanied by sales (purchases) of domestic currency assets by
9
the central bank, these operations should change the relative quantities of domestic and
foreign currencies in circulation and, hence, the parity between the two currencies.
This channel requires that domestic monetary policy is ruled by foreign exchange
policy, which should not be the case in a floating exchange rate regime. But as most
floating exchange rate systems are dirty floats, they can incur periods of unofficial
exchange rate targeting. Furthermore, when monetary and exchange rate policies are
conducted by two separate institutions 12 , then sterilization of interventions is probably
less automatic. If the same institution is in charge of both policies, interventions should
be sterilized in a floating exchange rate regime. The only exception would be the case
where a non-sterilized intervention is used as a monetary policy instrument to restrict or
expand the domestic quantity of money.
3.2
The portfolio-balance channel
In the 1970s and early 1980s, a new channel by which sterilized interventions
might have an effect on exchange rates, was theorized. The portfolio-balance channel
requires that investors are risk-averse and diversify their portfolios into domestic and
foreign financial securities. Financial markets’ equilibrium requires a risk premium on
the more risky assets to induce risk-averse investors to hold them. In this framework,
sterilized interventions can act on exchange rate dynamics by changing the relative
supplies and risks of domestic and foreign securities. For instance, in order to sterilize a
sale of foreign currency against the domestic currency, the central bank will increase its
purchases of domestic bonds. To be willing to sell some domestic bonds, international
investors must be immediately offered a higher price for these bonds (so the expected
10
return and the risk premium on domestic bonds decrease) in foreign currency. As the
domestic interest rate and thus the domestic prices of domestic bonds are kept
unchanged (as is the aim of sterilization), the only way the foreign price of the domestic
bonds can rise is through an appreciation of the domestic currency. On the contrary, a
sterilized purchase of foreign currency against the domestic currency, inducing a sale of
domestic bonds by the central bank, will require a decrease in the prices of domestic
bonds in foreign currency (so the expected return and the risk premium increase) with
the result that the domestic currency has to depreciate.
The portfolio channel predicts that selling foreign currency reserves will
appreciate the domestic currency, whereas increasing reserves should depreciate the
domestic currency. But these usual effects are reached indirectly, through the
adjustment of portfolios and returns to a change in the relative supplies and risks of
domestic and foreign assets. Obstfeld (1982) has shown, however, that in a Ricardian
world, where the private sector “internalizes” government debt and foreign exchange
reserves, a sterilized intervention can be ineffective even in the short term: it does not
change the net wealth level of the private sector, nor its perceived composition. 13 Strict
Ricardian equivalence is a strong assumption, but this result casts some doubt as to the
ability of the central bank to manage the exchange rate through the portfolio channel.
With the exception of Dominguez and Frankel (1993), empirical studies find no
evidence that intervention alters exchange rate levels through a portfolio-balance
channel (Rogoff, 1984; Lewis, 1988; Edison, 1993). As remarked by Obstfeld (1989),
the main reason for these bad results is that the intervention amounts, which could
11
appear paramount, are rather small when compared to the total daily activity in the
foreign exchange market, even if the birth of the Euro has reduced the foreign exchange
volume of transactions. According to the BIS survey on foreign exchange and
derivatives’ market activity, the daily average of the global foreign exchange market
turnover amounted to 2408 billions of US dollars in April 2004, whereas the value of
the overall world official reserves declared to the BIS by the central banks was 3010
billions of US dollars by the end of 2003. This means that the overall central banks’
official reserves amount to slightly more than one day of trading and that central banks
cannot by direct interventions alone counter a long lasting exchange rate trend.
3.3
The signalling channel
An additional channel through which sterilized interventions may influence
market expectations and the exchange rate is the “signalling channel” (Mussa, 1981).
According to the signalling theory, central banks’ interventions can recover some
efficiency through the signal they convey on future policy. Purchases (respectively
sales) of foreign currencies should signal an expansionary (contractionary) forthcoming
monetary policy. Interventions would be more efficient than simple announcements as
they back the commitment of the central bank to its new policy.14 It is important to
make a distinction between two kinds of signalling. Firstly, a central bank can intervene
in the foreign exchange market to signal the path of its future monetary policy.
Secondly, central banks can use foreign exchange interventions to signal their belief that
the exchange rate is misaligned. This second case implies that monetary authorities have
private information on the fundamental value of a foreign currency and that their aim is
to send this inside information (Humpage, 2000) to the market.
12
Under the assumption of highly efficient markets, central bank actions should
act immediately on the exchange rate, by altering expectations in the exchange market
(Mussa, 1981). If the foreign exchange market is highly efficient, in such a way that
new information is immediately taken into account in exchange rates levels, then it
would explain why the exchange rate seems to follow a “fair game” such as:
st +1 = s t + ε t+1
with E (ε t+1 I t ) = 0
where st +1 , the logged nominal exchange rate at time t+1, equals its value at time t, plus
all unexpected events captured by a random component, ε t +1 , called news. This means
the expected change, E (∆s t +1 I t ) , given all information I t at time t, is always equal to
zero:
E (∆s t +1 I t ) = E (ε t +1 I t ) = 0
In the signalling theory, exchange rate levels are likely to be disturbed in the
short term only if the information received by traders is strictly non-anticipated. When a
central bank intervenes in the foreign exchange market, it conveys a signal which
indicates, for instance, a change in the future monetary policy. If this signal is expected
by the market, the information given by the signal is already incorporated in the
previous day’s spot quote. By contrast, if the signal is “new” (e.g. unexpected), it will
immediately change the current exchange rate value. In other words, the signalling
effect will only be effective if the market did not already anticipate a change in the
monetary policy. Furthermore, the intervention effectiveness on the exchange rate (level
or volatility) will depend on whether the signal sent by the central bank is perceived by
the market as unambiguous and credible (Dominguez, 1998).
13
The signalling channel is largely acknowledged as the main way in which
interventions impact on foreign exchange markets (see, among others, Gosh, 1992;
Dominguez and Frankel, 1993; Lewis, 1995; Kaminsky and Lewis, 1996 or Vitale,
1999).
4
THE SURVEY RESULTS
Thirteen of the twenty central banks contacted responded to our survey. Table 1 in the
appendix reports the questions, answers and the list of responding monetary authorities.
To ensure the confidentiality of individual answers, we do not report the identity of the
respondent for each answer, except for the Banks of Japan and Sweden, for which we
use public information. In the case of Japan, public information on interventions
released by the Japanese Ministry of Finance enables us to answer Questions 1, 2 and 3
of our questionnaire.15 The Swedish central bank responded to our survey by sending
an official report on its intervention policy, which enables us to answer 5 out of the 13
questions asked.16 We report these inferred “answers” in Table 1 (appendix) but
separately because they are public knowledge. In Table 1 the figures on the number of
respondents do not always amount to thirteen (excluding Japan which did not officially
respond, but including Sweden) for each question: some respondents left questions
unanswered17 , while others chose more than one answer, an option left open for some
questions.
4.1
On the frequency and the magnitude of interventions
14
Questions 1 and 2 inquire about the frequency and the magnitude of
interventions. The 13 authorities surveyed frequently intervened on the foreign
exchange market in the last decade; according to the answers to Question 1, nearly 70%
of the respondents intervened more than fifty times (one-off or repeated interventions).
As for the magnitude of intervention: 80% of the respondents declare that their highest
intervention amount of the last decade was above one billion of USD while 20%
(including the Bank of Japan) declare an amount of more than ten billions of USD.
We have compared these results with the official intervention data available for
the Federal Reserve, the Bundesbank and the Bank of Japan. According to the data
reported in Table 2 in the appendix, these three central banks pursued active
intervention policies in the nineties and more specifically the Bank of Japan over the
last years. As a matter of fact, the Japanese authorities intervened 338 times on the
USD/YEN between 1992 and 2004, 128 of these interventions taking place during the
short period 2003-2004, that is almost twice more than between 1995 and 2002. The
Fed and the Bundesbank intervened repeatedly during the period 1990-199618 . The
Bundesbank was very active on the FOREX in 1991-1992, during the E.M.S. crisis,
while the Fed intervened in 1994-1995 against the DEM and the YEN. Otherwise,
except for the recent concerted G-7 interventions on 22nd September 2000 and the
unilateral E.C.B. interventions in November 2000, both aimed at supporting the Euro,
the Bundesbank (or the ECB) and the Fed have not intervened in the FX market since,
respectively, 1996 and 1998.19
15
Table 3 in the appendix reports the intervention amounts for these three major
central banks. It shows that the average intervention size rose dramatically in the
nineties, at least for these central banks. Indeed, the average amounts of central bank
interventions reached unprecedented highs in the last decade, especially in the late
1990s and early 2000s. In Japan, the arrival of Dr. Sakakibara at the head of the
ministry of finance in June 1995 (until 2002) involved a radical change in the
intervention policy: interventions are practiced in a more visible manner, in the sense
where they are less frequent than in the early 1990s but the invested amounts are much
larger, with an average of 5.57 billions of USD. The Japanese intervention of 10th April
1998 is probably amongst the largest intervention recorded for one day with sales of
about 20 billions of USD. The concerted intervention on the Euro in September 2000
has been the most important carried out by the Fed and the ECB in the last decade: it
involved 1.5 billions of USD on the part of the Federal Reserve 20 and the estimated
E.C.B intervention was around 3 billions of USD (Gros and Ritter, 2000).21 Note that
this increase in the average amounts involved in interventions follows the huge rise in
the daily transactions volume in the FOREX, documented by BIS surveys.22
The available data confirm the result of our survey. Foreign exchange
intervention remained an active policy tool in the last decade, with the decrease in the
frequency of intervention of some central banks being compensated by a huge increase
in their average intervention size. But the comparison between the survey results and
external data on FX interventions also reveals disparities between central bank practices
and an evolution of intervention methods during the last decade. Since the mid nineties
the Bank of Japan, the Bundesbank and the Federal Reserve opted for a policy of less
16
frequent but larger (on average) interventions.23 Central banks are increasingly aware
that to be effective, through the signalling and (perhaps) the portfolio channels,
interventions must involve significant amounts. As noticed by Kim, Kortian and Sheen
(2000), the response of the foreign exchange market “may depend on whether the
intervention on the day is large enough to have a significant effect on the current
trend”. The size of interventions must be large enough in order to be credible
(signalling channel) or to involve significant portfolio effects.
4.2
How and when are interventions conducted?
In answer to Question 3, nearly 93% of the respondents have reported that their
interventions are always sterilized, i.e. they do not change the monetary base. This
means that intervention is not used as a tool for monetary policy; a result which differs
from the one found by Neely (2001), whose survey includes central banks from Latin
America and Asia.24
Central banks have a choice as regards their counterparts. According to the
answers given to Question 4, they seem to have a preference for dealing with major
domestic banks (80% of respondents), probably in order to ensure liquidity and to
achieve high visibility, but they sometimes deal (in a decreasing preference order) with
major foreign banks, brokers or other central banks acting as agents. These answers are
consistent with the view that the main channel through which foreign exchange
intervention works is the signalling channel.
17
Answers to Question 5 show that most interventions take place during normal
working hours, in the morning or afternoon, when the domestic Forex market is open
and the market liquidity on the home currency is rather high, and very seldom outside
business hours (lunch time, evenings, week-ends or holidays). Generally, answers to
Questions 4 and 5 are consistent with the results reported by Neely (2001), as well as
with the pre-eminence of the signalling channel.
Our results in this field can be complemented by information gathered from the
literature on foreign exchange interventions. According to Goodhart and Hesse (1993),
the U.S. monetary authorities appear to favour intervention while the European markets
are still open. There could be some tactical tendency for central banks to intervene when
the European and U.S. markets overlap. The Bank of Australia, however, has publicly
stated that it prefers to intervene outside of normal business hours (Rankin, 1998).
Overall, whether the preferred timing of intervention is in the morning, afternoon or at
lunchtime reflects mostly the difference between the time zones.25
4.3
What are the motivations for secret interventions ?
The main reasons invoked by the surveyed central banks for keeping
interventions secret (Question 6) are either to minimize the effect on the market (30% of
respondents) and/or to counter speculative attacks (30% of respondents). The first
motive can apply in cases where the central bank’s interventions aim to reallocate their
currency reserves or when the exchange rate policy is inconsistent with the monetary
policy. As a matter of fact, central banks sometimes trade in FX markets simply to
adjust their portfolio of foreign exchange reserves. Such actions are not designed to
18
change exchange rate levels, therefore they do not exactly match the usual definition of
FX intervention. The second motive can apply in cases where the central bank does not
wish to disclose too much information on the current state of its reserves or wants to
surprise speculators. Therefore the second motive seems more relevant for official or
unofficial target zone systems. Sometimes, however, both motives could apply: keeping
interventions secret in order to counter speculative attacks and minimize their effects is
relevant in cases where visible interventions are inappropriate, as they might draw the
market attention to inconsistencies.26
According to some recent studies (Fatum and Hutchinson, 2002; Jansen and de
Haan, 2003; Fratzscher, 2004; Beine et al., 2004), there is a tendency during the recent
years towards more transparent intervention policy: communication policy (“oral
intervention”) has been acknowledged to play a significant role in enhancing the
effectiveness of the exchange rate policy with or without actual intervention in the
FOREX. An illustration of the transparency policy practiced by major central banks is
the release of official intervention data to the public, albeit with a lag. For instance, the
Bank of Japan recently made its official intervention data freely available to the public.
Furthermore, the Fed and the Bank of Canada confirm all intervention operations and
the Fed gives the amounts in quarterly reports. The Bundesbank repeatedly dispatched
its intervention data to economists for research purposes.27
In this context, secret interventions are not anymore an instrument valued by
central banks. As a matter of fact, available data on the interventions of the Bundesbank
and the Federal Reserve show that these two major central banks made almost no secret
19
interventions28 during the period 1991-2004 (Table 4 in appendix).29 One exception is
the Bank of Japan which has intervened frequently in a discreet way during the period
2003-2004, with more than 80% of secret interventions.30 This tendency towards more
advertised interventions is consistent with the theory according to which central banks
increasingly try to act through the signalling channel. If its exchange rate target is
sustainable31 , a central bank must disclose its intentions and actions with a maximum of
transparency in order to avoid sending an ambiguous signal to the market.
4.4
What are the motivations for intervention?
For 90% of the central banks responding to Question 7 most interventions during
the last decade were intended to “lean against the wind”, e.g. to move the exchange rate
in the direction opposite to its current trend. Fewer interventions seem to have been
made to “support the current exchange rate trend” (20% of respondents). Answers to
Question 8 are quite consistent with the results of Question 7, as the first motive given
for intervention in the last decade is “to correct or prevent long-term misalignments of
exchange rates with fundamental values” (about 66% of respondents to Question 8).
The second motive (33% of respondents) given for intervention is “to calm market
disorders or reduce exchange rate volatility”. A third motive given by some central
banks as an explanation for choosing the answer “Other” (25% of respondents), is to
keep exchange rates within the allowed fluctuation margins of a fixed or managed
regime.32
Our survey therefore supports the results found by a number of studies,
according to which central banks “leaned against the wind” in the post-Louvre period
20
(Almekinders and Eijffinger, 1993; Dominguez and Frankel, 1993; Baillie and
Osterberg, 1997a,b; Beine et al., 2002a). However, Almekinders and Eijffinger draw a
distinction between the objectives of exchange market interventions in the short,
medium and long-term. In the short-term, the main central bank objective is to “counter
disorderly exchange market conditions” while the medium-term objective is to counter
short-term exchange rate variations which exceed a certain size. Finally, the long-term
objectives consist of reducing the exchange rate misalignment with respect to the
economic fundamentals. Hence, it seems that the primary motives for intervention in the
last decade, those of “leaning against the wind” and correcting misalignments of
exchange rates with fundamental values, were medium and long term objectives, while
the short-term objective of exchange rate volatility reduction was less frequent. The
central banks’ responses are also consistent with the purposes of interventions put
forward in official speeches. Many coordinated interventions were achieved in order to
help the “orderly shift of parities” (1995, speech on April 25th of the finance ministers
and central bank governors of the G-7, Washington).33
4.5
The signalling effect of interventions
The signalling effect of intervention (Question 10) is given by most central
banks as the main channel through which interventions act on the exchange rates (78%
of respondents), while the direct effect of buying and selling reserves is far less
frequently quoted (22% of respondents).34 Central banks do not appear to trust the
effectiveness of the portfolio channel, as none quoted it. For 56% of the responding
central banks, international communication, such as central banks’ governors’ speeches,
are essential to the success of intervention, while for 34% of respondents, the
21
effectiveness of the signalling depends on the fact that interventions are carried out in a
concerted manner (Question 11). These answers are consistent with the other results of
the survey. In Sections 4.2 and 4.3 we saw that central banks principally deal with
major domestic banks and generally report interventions, probably in order to maximise
the effect of announcements.
The fact that the intervention amounts recently reached unprecedented highs
(Section 4.1) is consistent with the use of the signalling channel by central banks. The
greater the amount involved, the more credible the commitment of the central bank to
adjust its future policy. Coordinated intervention can also be a useful device to enhance
the signal’s credibility. Available data on coordinated interventions confirm that
concerted interventions remained frequent in the last decade (Table 5, appendix). Since
1991, most interventions by the Fed and the Bundesbank (or the E.C.B.) were made in a
concerted manner.35 For instance, the Fed intervened 21 times on the yen/dollar of
which 17 interventions were coordinated with the BOJ. Furthermore, it intervened 17
times on the DEM (or Euro/USD) with 11 interventions concerted with the Bundesbank
(or the E.C.B). The Bank of Japan appears as an exception; during the total period its
frequent interventions were predominantly unilateral (314 unilateral interventions as
opposed to 24 coordinated ones).
The pre-eminence given by central banks’ responses to the signalling channel is
also consistent with the recent tendency towards increasingly advertised exchange rate
policies: monetary authorities, when intervening, want to send a credible and nonambiguous signal on their future monetary policy to the market. Governors’ statements
22
are a good signalling tool as they can enable market participants to better understand the
aims of the intervention (Fatum and Hutchinson, 2002; Jansen and de Haan, 2003;
Fratzscher, 2004; Beine et al., 2004).
4.6
On the effectiveness of interventions
To the delicate question about the duration of the intervention effect on
exchange rates (Question 12), about 71% of respondents answered “other”, while the
remaining 29% said that the effects on average last “between one day and one week”. 36
According to Sweden’s central bank report on its intervention policy, the effectiveness
of intervention could stretch to the medium-term, though this term is not precisely
defined. Some respondents explained their choice of the answer “Other” by underlining
that the endurance of the effect of intervention depends greatly on the context of the
intervention operation, its objectives and the underlying market perception of the
exchange rate’s sustainable level and volatility. Neely (2001) found a great dispersion
of answers, indicating disagreement among central bankers. According to the results of
our survey, no consensus exists on the means to enhance the effectiveness of
interventions: for 50% of responding central banks, “several repeated interventions”37
are preferable (Question 9) while for the other 50% “one time interventions involving
large amounts” are better. The question should probably have been worded somewhat
differently, as external data point out that large amounts are becoming the rule. The
credibility of the central bank (Question 13) depends for 58% of respondents on the
“consistency of its communication policy”, and for 42% of respondents on the fact that
the central bank has “a long experience of success in interventions”. One of the central
banks surveyed added that another important issue for central bank credibility in the
23
foreign exchange market is “to have a respected and professional market presence
outside of interventions operations, which would involve regular dealings with a broad
range of market participants”.
The dispersion of answers to Questions 9 and 13 and the reluctance to answer
Question 12 regarding the effectiveness of interventions are understandable in view of
the literature results. The literature review does not provide a strong support in favour of
effectiveness (Edison, 1993; Sarno and Taylor, 2001). Ultimately, the effectiveness of
interventions relies, through the signalling effect, on the central bank credibility in the
FX market. If market participants adjust their exchange rate (volatility or level)
forecasts in line with the exchange rate level/volatility targeted by the intervention,
effectiveness should be ensured. Therefore it would be interesting to check if FX
practitioners’ view of interventions is consistent with central banks aims. Our survey
focused on central banks, but the existing literature casts some light on the market
perception of central bank interventions. Interestingly, Cheung and Wong (2000)
surveyed practitioners in the Asian interbank foreign exchange markets.38 According to
their results, over 60% of the responding practitioners find that intervention increases,
rather than reduces, exchange rate volatility. But more than one half believe that
interventions move exchange rates towards their fundamental values. These results
should be interpreted with caution as the survey is limited to three Asian countries. It
should, however, be noted that these results are consistent with the answers to Question
8 in our survey, according to which the first motive for central bank intervention in the
last decade was to correct long-term misalignments of exchange rate with fundamental
values and, only to a lesser extent, to reduce exchange rate volatility. Therefore, it
24
seems that central banks have enough credibility to make market participants aware that
exchange rates are disconnected from their fundamental values, but at the same time
they have a tendency to increase volatility when they intervene.
5
CONCLUSION
This study displays the findings from a questionnaire sent to central banks of
industrialized countries about their FX intervention operation practices during the last
decade.
The signalling effect is always clearly put forward by central banks as the main
channel through which intervention should work. The central banks’ belief in the preeminence of the signalling channel is consistent with the three other main results of the
survey: 1) the choice of a large sized intervention and the stress on international
communication and concerted interventions as means of ensuring effectiveness; 2) the
preference towards major domestic banks as counterparts could also be linked to a
strategy of maximizing announcement effects; 3) the fact that the majority of the central
banks surveyed seem to find no motivation for secret interventions and often stated that
they do not use them.
The first motive for intervention in the last decade was, according to central
banks responses, to correct or prevent long-term misalignments of exchange rates with
their fundamental values and, but to a lesser extent, to reduce exchange rate volatility.
25
Regarding the effectiveness of interventions, responding central banks often
answered to the effect that it depends strongly on the credibility of the central bank,
which is linked with the consistency of its communication policy and length of
successful experience in interventions.
ACKNOWLEDGEMENTS
We are grateful for financial support from the Institut CDC pour la recherche and for
Central Bankers’ willingness to participate in the survey. Comments by Michel Beine,
Agnes Benassy-Quere and Sebastien Laurent helped us to improve the paper. The usual
disclaimer applies.
26
APPENDIX
Table 1: Summary of Central Banks’ Survey Responses♦
No. of
responses
Questions
Sweden
Japan
% **
1. In the last decade, approximately how many interventions have been
conducted by your monetary authority?
12*
less than 10 interventions
3
23.1
between 10 and 20 interventions
1
7.7
between 20 and 30 interventions
0
0
between 30 and 40 interventions
0
0
between 40 and 50 interventions
0
0
more than 50 interventions
8
2. What are the intervention amount records (for a day or successive
intervention days)?
more than 500 million dollars
yes
69.2
9*
1
10.0
more than 1 million dollars
5
50.0
more than 5 million dollars
1
10.0
more than 10 million dollars
1
other
1
3. Are interventions always sterilised ?
yes
12*
11
no
1
yes
20.0
10.0
yes
yes
92.8
7.1
10*
4. Most interventions are conducted with:
major domestic banks
8
80.0
major foreign banks
6
60.0
directly via broker(s)
6
60.0
in cooperation with other central banks
3
30.0
other
1
10.0
11*
5. The interventions usually take place:
on the morning of the business day
9
82.0
on the afternoon of the business day
7
63.6
after normal business days (during lunch time or in the evening)
1
9.1
during holidays or the week-ends
0
0
other
1
9.1
6. What is the main reason for secret interventions :
they are kept secret in order to minimize the effect in the market
9*
3
30.0
27
they are kept secret in order to hide the state of the exchange reserves
0
they are kept secret in order to counter speculative attacks
3
other
5
0
yes
30.0
50.0
9*
7. In the last decade, most interventions intended to:
move the exchange rate in the opposite direction to its current trend
8
support the current exchange rate trend
2
yes
90.0
20.0
11*
8. In the last decade, the first motive for intervention was:
to correct/prevent long-term misalignments of exchange rates with
fundamental values
7
yes
66.7
to calm market disorders (i.e. reduce exchange rate volatility)
4
33.3
to profit from speculative trades
0
0
to adjust the foreign exchange portfolio holdings of the Central Bank
0
0
other
3
25.0
* Number of respondents, excluding the Central Bank of Sweden and the Bank of Japan. As respondents could
in some cases choose more than one answer, the total number of respondents (grey line) is not always equal to
the sum of the responses (white lines).
** Number of respondents to the questions, including Sweden and Japan (in percentage).
28
Table 1 (continued) : Summary of Central Banks’ Survey Responses
No. of
responses
Questions
Sweden
Japan
% **
6*
9. Which is more effective :
several repeated interventions
3
50
… or one-off interventions, but involving large amounts
3
50
10. What is the main channel through which interventions impact on the
Forex:
the direct effect of buying and selling reserves
9*
2
22.3
the adjustment of private investors’ portfolios induced by the interventions
0
0
the signalling effect of the intervention
7
77.8
other
8*
11. Which is more important for the effectiveness of the signalling:
the fact that the interventions are carried out in a concerted manner
3
international communication modalities
5
other
1
12. In your opinion, how long does the intervention effect last on exchange
rates?:
less than one day
33.3
yes
55.6
11.1
7*
0
0
between one day and one week
2
28.5
one month
0
0
more than one month
0
0
more than one year
0
0
other
5
71.4
13. In your opinion, in order to be credible in the FX market, a central bank
must, above all:
speak with one voice
12*
7
58.3
support the trend of the market
1
8.3
have a long experience of success in interventions
5
41.7
intervene in a concerted way with other central banks
2
16.7
other
0
0
* Number of respondents for each question, excluding the Central Bank of Sweden and the Bank of Japan. As
respondents could in some cases choose more than one answer, the total number of respondents (grey line) is not
always equal to the sum of the responses (white lines).
** % of the number of respondents to the questions, including Sweden and Japan.
♦
List of responding central banks :
Reserve Bank of Australia
National Bank of Belgium
Denmark Central Bank
Deutsche Bundesbank
Bank of Canada
Bank of England
European Central Bank
National Bank of Hungary
Central Bank of Ireland
Norway Bank
Federal Reserve of the United States
Swiss National Bank
Sweden Central Bank
29
Table 2: Number of official intervention days on the DEM/USD,
EUR/USD or USD/yen
:
Fed no. of
a
intervention days
Fed:
Bundesbank no. of
Buba :
in % *
intervention days
in % * intervention days
BOJ : no. of
b
BOJ :
in % *
01/01/85 - 22/02/87
44
7.89
62
11.11
36
6.45
23/02/87 - 31/12/91
325
13.99
188
14.86
133b
10.51
01/01/92 - 31/12/95
36
1.09
10
0.68
169
16.34
01/01/96 - 31/12/02
2
0.05
4
0.23
41
2.22
01/01/03 - 01/09/04
0
0
0
0
128
28.31
* Interventions days in % of the total number of days of the period.
a
It includes the number of the Fed interventions both against the EUR/USD and the USD/yen.
b
Numbers are based on Japanese interventions (on the USD/yen) reported in the Wall Street Journal and the
Financial Times.
Table 3: Average amounts of intervention (billions of dollars)a
on the EUR/USD and the USD/yen
Fed
Bundesbank
BOJ
01/01/85 - 22/02/87
0.18
0.10
na
23/02/87 - 31/12/91
0.29
0.12
na
01/01/92 - 31/12/95
0.88
0.27
0.60
01/01/96 - 31/12/02
b
2.38
na
c
5.57
01/01/03 - 01/09/04
0.00
0.00
2.61
a The average amounts of interventions include dollar purchases and the absolute value of dollar sales and
exclude the days where there have been no interventions.
b The concerted intervention of September 2000 amount is estimated to have been close to 6 billion USD,
of which the Fed contributed 1.5 billions (according to the N.Y. Federal Reserve quarterly report).
c The 3 unilateral E.C.B. intervention amounts of November 2000 are unknown. The contribution of the
ECB to the concerted intervention of September 2000 on the EUR.USD is estimated to be around 3
billion Euros.
30
Table 4: Percentages of unreported interventions a in the total number of
official interventions
Fed
b
Bundesbank
BOJ
01/01/85 - 22/02/87
52.27
50.00
na
23/02/87 - 31/12/91
29.23
44.15
na
01/01/92 - 31/12/95
0.05
0.00
15.38
01/01/96 - 31/12/02
0.00
0.00
0.00
01/01/03 – 01/09/04
0.00
0.00
82.81
a
Defined as official interventions unreported in the media of reference. These are the Financial Times
and the Wall Street Journal over 1985-1992 and Reuters news afterwards.
b
It includes Fed interventions both on the EUR/USD and the USD/yen.
Table 5: Percentages of concerted interventions in the total number of official
interventions
On the USD/Yen
Fed
On the EUR/USD
BOJ
Fed
Bundesbank
a
01/01/85 - 22/02/87
63.64
38.89
72.73
25.81
23/02/87 - 31/12/91
66.89
74.44a
44.63
42.02
01/01/92 - 31/12/95
80.00
12.42
65
100.00
01/01/96 - 31/12/02
100.00
7.31
100.00
25.00
01/01/03 – 01/09/04
0,00
0.00
0.00
0.00
a
Number based on Japanese interventions reported in the Wall Street Journal and the Financial Times.
31
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1 See amongst others: Taylor, 1982; Jurgensen report, 1983; Dominguez and Frankel, 1993; Edison,
1993; Baillie and Humpage, 1992; Connoly and Taylor, 1994; Bonser-Neal and Tanner, 1996; Kaminsky
and Lewis, 1996; Baillie and Osterberg, 1997a,b; Dominguez, 1998; Galati and Melick, 1999; Aguilar
and Nydahl, 2000; Beine et al., 2002.
2 On one hand, our survey includes respondents absent from the study by Neely: the Australian Central
Bank, the Bank of England, the European Central Bank, the Hungarian Central Bank, Norway Central
Bank. On the other hand, Neely’s survey includes central banks absent from ours, which are the central
banks of the following countries: Brazil, Chile, the Czech Republic, France, Hong Kong, Indonesia, Italy,
Japan, New Zealand, Poland, South Korea, Spain, Taiwan. France, Italy and Spain have commissioned
the ECB to voice their answers in our Survey. Japan seemingly relies on its new policy of foreign data
intervention releases (currently available on www.mof.go.jp) and does not wish to comment on it any
further.
3 According to the BIS annual report (2004) by the end of 2003, 70% of the official foreign exchange
reserves were dollar reserves and more than one third of official reserves were held by central banks of
industrial countries. These central banks can intervene for larger amounts than the central banks of
developing countries and they probably have quite different intervention practices. Central Banks of
industrialized countries are not subject to the same constraints as developing countries’ central banks:
they rely less heavily on capital controls and on unilateral currency systems (unilateral pegs, currency
boards, dollarization).
4 The period covered by our survey includes the years 2000 and 2001, whereas the survey conducted by
Neely ends in 1999, before the ECB’s first interventions.
5 This is the case of the Federal Reserve, the Bundesbank, the Bank of Japan (since 2001) and the
Reserve Bank of Australia (which has not intervened on the exchange market since 1994). The Bank of
Canada and the Swiss National Bank have made their data available but only to their own staff of
economists.
6 Such inconsistency between monetary policy and exchange rate policy could stem from a situation
where exchange rate policy is influenced by the government whereas the monetary policy is
independently conducted by the central bank.
7 As Dominguez (1999) points out, central banks have generally developed relationships with
commercial banks, in such a way that allows them to inform the market of their presence within minutes
of the intervention operations or to keep them secret.
8 Recently, Beine and Lecourt (2004) have re-examined the procedure used to isolate secret interventions
from the reported ones. They use a new identification scheme that overcomes most of the limitations that
37
result from using financial newspapers. The authors show that secret operations have recently been
favoured by the Bank of Japan.
9 See the recent comprehensive survey of Humpage (2003).
10 Hung (1997) introduces the noise-trading channel. Noise traders are traders whose demand for
currencies is affected by beliefs that are not fully consistent with economic fundamentals (Kortian 1995).
Hung suggested that, through interventions on currency reserves, central banks can influence noise traders
choices. This “additionnal” channel is related to the expectations channel as it relies on changing traders
beliefs.
11 Sterilized intervention is ineffective within the standard monetary model of exchange rate
determination.
12 This is the case in the United States where the Treasury is responsible for foreign exchange
intervention, whereas the Federal Reserve conducts the domestic monetary policy.
13 In a Ricardian world government debt is equivalent to future taxes. Similarly, assuming all foreign
reserves bear interest, the income on foreign reserves can be interpreted as a negative future tax or it can
simply be assumed that the central bank pays these interests to the private sector. In such a framework a
sterilized selling of foreign exchange is ineffective. Sterilization implies that the monetary authority buys
back government bonds from the private sector, which leaves private wealth unaffected as it also reduces
future taxes. With the monetary resources gained from the government bonds sale, the private sector is
able to buy the foreign exchange reserves sold by the central bank. But as the income from these foreign
assets already came to the private sector, the net effect on private wealth is again null.
14 This interpretation assumes that there is a cost of intervention or that the central bank is showing its
willingness to bet on its future monetary policy. For instance, according to the monetary models of the
exchange rate, an expansionary monetary policy appreciates foreign currencies relative to the domestic
currency, which makes former foreign currency purchases by the Central Bank profitable.
15 The case of Japan is quite specific: after decades of secrecy about its FX interventions, the Ministry of
Finance of Japan has drastically changed its strategy since October 2000 by making information on its
interventions carried out since April 1991 available on its website. But the Japanese authorities seemingly
do not wish to comment further on their foreign exchange interventions, as they did not answer our
questionnaire which was sent both to the Ministry of Finance of Japan, in charge of the FOREX
interventions policy, and to the Bank of Japan, which intervenes on the account of the MOF.
16 “The Riksbank’s interventions in the foreign exchange market: preparations, decision-making and
communication”, Sveriges Riksbank, 31 January 2002.
17 The European Central Bank has agreed to answer Questions 1, 3, 8, 10 and 13.
18 However, the interventions of the Federal Reserve and the Bundesbank (or the E.C.B.) have been less
frequent in the nineties than in the aftermath of the Louvre agreement (1987-1991).
19 On 17th June 1998, the U.S. monetary authorities intervened in cooperation with Japanese monetary
authorities, selling a total of $833 millions against the YEN.
20 N.Y. Federal Reserve quarterly report.
38
21 The official amounts of the concerted intervention of September 2000 and of the November 2000 ECB
unilateral interventions have not been disclosed. We only have estimations for the concerted intervention.
22 From 1989 to 2004 the average daily foreign exchange turnover has been multiplied by more than
three.
23 The Bank of Japan was, however, extremely active over the recent years 2003-2004 (period called
“post-Sakakibara”; see Ito, 2002; Gnabo and Lecourt, 2005) intervening unilaterally 128 times with an
average intervention amount reduced by half compared to the previous period 1996-2002.
24 He reported that 30 percent of the authorities surveyed change the monetary base, 30 percent
sometimes change the base and 40 percent never change the base.
25 According to Dominguez (1999), the screen news on Reuters allows one to compute that, on average,
the Fed intervenes at 14:57:10 GMT, the Bundesbank at 11:31:16 GMT and the BOJ at 3:56:36 GMT.
26 It might be an inconsistency between the monetary and exchange rate policies or the need to conceal
the choice of a misaligned exchange rate target (Vitale, 1999).
27 The ECB has been until now far less transparent on its interventions (for instance the amounts are kept
secret even after the intervention operation). This reinforces the conclusion that the ECB is not a simple
continuation of the Bundesbank.
28 Secret interventions are proxied by official interventions unreported by the Press.
29 The practice of secret interventions seems to have been far more frequent during the post-Louvre
period, mostly between 1985 and 1987. According to Table 4 approximately 50% of interventions where
conducted secretly by the Fed and the Bundesbank between January 1985 and February 1987. However in
this subperiod the proxy used for secret interventions probably overestimates the percentage of secret
intervention: for 1985-1987, the proxy used for secret interventions is the percentage of official
interventions unreported by the Financial times, Reuters news records being unavailable for this period.
30 One possible explanation to the shift in the Japanese policy compared to previous period (the
Sakakibara period characterised by transparency) lies in the disagreement between the Japanese
authorities and other central banks (especially the Fed) about the opportunity to manage the exchange rate
(Beine and Lecourt, 2004).
31 This means that central banks may aim to restore exchange rates to their fundamental values, as,
contrary to the assumption made by Vitale (1999), dealers do not always bet on the exchange rate’s
fundamental values.
32 The Norway Bank had a managed float regime from December 1992 until 29th March 2001.
33 They also declared that “the recent fluctuations have been beyond that which would have justified the
underlying economic conditions in the major countries”. Therefore, though misalignment seems to have
been the ministries of finance primary concern, volatility was also deemed excessive, as exchange rate
fluctuations appeared largely disconnected from their macroeconomic determinants.
34 This answer concerns mostly central banks in fixed or managed exchange rate regimes, in cases where
the bank acts independently and is not seeking strong signalling effects.
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35 From 1987 to 1991, most interventions on the yen/dollar where indeed made in a coordinated manner
and the Bundesbank also increased its practice of concerted interventions on the USD/DEM. The recent
decrease in the percentage of concerted interventions of the Bundesbank/E.C.B. over the period 19962001 is not significant as there were few interventions during this period (4 interventions of which 1 was
concerted).
36 Dominguez (1999) found that the effects of interventions last at least to the end of the day.
37 Many central banks added “with large amounts” to this answer.
38 The survey was conducted between October 1995 and January 1996 in the interbank foreign exchange
markets in Hong Kong, Tokyo and Singapore; 392 questionnaires were returned complete with answers
out of a total of 1,961 questionnaires sent.
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