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Why the Bank of Israel Intervenes in the Foreign Exchange Market, and What Happens to the Exchange Rate

Author

Listed:
  • Sigal Ribon

    (Bank of Israel)

Abstract
The Bank of Israel renewed its intervention in the foreign exchange market in early 2008 after about a decade of not intervening. This study examines the effect of the Bank’s purchases on the shekel exchange rate. The two-stage estimation approach provides the opportunity to understand the factors influencing the timing and scope of the intervention. The results of the estimation show that the Bank of Israel’s purchases contributed to a depreciation of the shekel. The average monthly volume of purchases for periods in which the Bank of Israel actually intervened in the market, approximately $830 million, contributed to a depreciation in the nominal effective exchange rate that was larger by about 0.6 percent, compared with a month with no intervention. The level of foreign exchange reserves (relative to GDP) and the deviation of the real exchange rate from its long-term equilibrium level tend to increase the volume of purchases by the central bank. Support for "leaning against the wind" behavior by the central bank was also found. The results suggest that the "signaling channel" is important in explaining the effect of intervention on the exchange rate.

Suggested Citation

  • Sigal Ribon, 2017. "Why the Bank of Israel Intervenes in the Foreign Exchange Market, and What Happens to the Exchange Rate," Bank of Israel Working Papers 2017.04, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2017.04
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    File URL: https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2017.04.pdf
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    References listed on IDEAS

    as
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    2. Fratzscher, Marcel & Gloede, Oliver & Menkhoff, Lukas & Sarno, Lucio & Stöhr, Tobias, 2019. "When Is Foreign Exchange Intervention Effective? Evidence from 33 Countries," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 0(1), pages 132-156.
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    Cited by:

    1. Itamar Caspi & Amit Friedman & Sigal Ribon, 2022. "The Immediate Impact and Persistent Effect of FX Purchases on the Exchange Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 18(5), pages 1-31, December.
    2. Tanya Suhoy & Yotam Sofer, 2019. "Getting to Work in Israel: Locality and Individual Effects," Bank of Israel Working Papers 2019.02, Bank of Israel.
    3. Alex Cukierman, 2019. "Forex Intervention and Reserve Management in Switzerland and Israel since the Financial Crisis: Comparison and Policy Lessons," Open Economies Review, Springer, vol. 30(2), pages 403-424, April.
    4. Anton Grui, 2020. "Uncovered interest parity with foreign exchange interventions under exchange rate peg and inflation targeting: The case of Ukraine," IHEID Working Papers 14-2020, Economics Section, The Graduate Institute of International Studies.
    5. Assaf Razin, 2019. "The Struggle Toward Macroeconomic Stability: An Analytical Essay," Israel Economic Review, Bank of Israel, vol. 17(1), pages 1-38.
    6. Piccotti, Louis R. & Schreiber, Ben Z., 2020. "Information shares in a two-tier FX market," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 19-35.

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