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Blowing against the Wind? A Narrative Approach to Central Bank Foreign Exchange Intervention

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  • Naef, Alain
Abstract
Most countries in the world use foreign exchange intervention, but measuring the success of the policy is difficult. By using a narrative approach, I identify interventions when the central bank manages to reverse the exchange rate based on pure luck. I separate them from interventions when the central bank actually impacted the exchange rate. Because intervention records are daily aggregates, an intervention might appear to have changed the direction of the exchange rate, when it is more likely to have been caused by market news. This analysis allows to have a better understanding of how successful central bank operations really are. I use new daily data on Bank of England interventions in the 1980s and 1990s. Some studies find that interventions work in up to 80% of cases. Yet, by accounting for intraday market moving news, I find in adverse conditions, the Bank of England managed to influence the exchange rate only in 8% of cases. I use natural language processing to confirm the validity of the narrative approach. Using lasso and a VAR analysis, I investigate what makes the Bank of England intervene. I find that only movement on the Deutschmark and not US dollar exchange rate made the Bank intervene. Also, I find that interest rate hikes were mostly a tool for currency management and accompanied by large reserve sales.

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  • Naef, Alain, 2022. "Blowing against the Wind? A Narrative Approach to Central Bank Foreign Exchange Intervention," SocArXiv u59gc, Center for Open Science.
    • Handle: RePEc:osf:socarx:u59gc
    DOI: 10.31219/osf.io/u59gc
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    Cited by:

    1. Alain Naef & Jacob P. Weber, 2021. "Regional How Powerful is Unannounced, Sterilized Foreign Exchange Intervention?," Working papers 834, Banque de France.
    2. Alain Naef, 2021. "Dirty float or clean intervention? The Bank of England in the foreign exchange market," European Review of Economic History, European Historical Economics Society, vol. 25(1), pages 180-201.
    3. Alain Naef & Jacob P. Weber, 2023. "How Powerful Is Unannounced, Sterilized Foreign Exchange Intervention?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(5), pages 1307-1319, August.
    4. Eichengreen, Barry & Naef, Alain, 2022. "Imported or home grown? The 1992–3 EMS crisis," Journal of International Economics, Elsevier, vol. 138(C).

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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • N14 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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