Ruhr Economic Papers

Ruhr Economic Papers #428

Foreign Exchange Market Interventions and the $-¥ Exchange Rate in the Long-Run

by Joscha Beckmann, Ansgar Belke and Michael Kühl

University of Duisburg-Essen, 07/2013, 33 S./p., 8 Euro, ISBN 978-3-86788-484-6 DOI: 10.4419/86788484

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Abstract

This paper tries to clarify the question of whether foreign exchange market interventions conducted by the Bank of Japan are important for the Dollar-Yen exchange rate in the long-run. Our strategy relies on a re-examination of the empirical performance of a monetary exchange rate model. This is basically not a new topic; however, we put our focus on two new questions. Firstly, does the consideration of periods of massive interventions in the foreign exchange market help to uncover a potential long-run relationship between the exchange rate and its fundamentals? Secondly, do Forex interventions support the adjustment towards a long-run equilibrium value? Our overall results suggest that taking periods of interventions into account within a monetary model does improve the goodness of fit of an identified long-run relationship to a significant degree. Furthermore, Forex interventions increase the speed of adjustment towards long-run equilibrium in some periods, particularly in periods of coordinated Forex interventions. Our results indicate that only coordinated interventions seem to stabilize the Dollar-Yen exchange rate in a long-run perspective. This is a novel contribution to the literature.

JEL-Classification: E44, F31, G12

Keywords: Structural exchange rate models; cointegration; intervention analysis

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