Discussion Paper Series 2009-E-6

A New Method for Identifying the Effects of Foreign Exchange Interventions

Chih-nan Chen, Tsutomu Watanabe, Tomoyoshi Yabu

The monetary authorities react even to intraday changes in the exchange rate; however, in most cases, intervention data is available only at a daily frequency. This temporal aggregation makes it difficult to identify the effects of interventions on the exchange rate. We propose a new method based on Markov Chain Monte Carlo simulations to cope with this endogeneity problem: We use "data augmentation" to obtain intraday intervention amounts and then estimate the efficacy of interventions using the augmented data. Applying this method to Japanese data, we find that an intervention of one trillion yen moves the yen/dollar rate by 1.7 percent, which is more than twice as large as the magnitude reported in previous studies applying OLS to daily observations. This shows the quantitative importance of the endogeneity problem due to temporal aggregation.

Keywords: Foreign exchange intervention; Intraday data; Markov-chain Monte Carlo method; Endogeneity problem; Temporal aggregation

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2009 Bank of Japan All Rights Reserved.

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