Working Paper: NBER ID: w9875
Authors: Kathryn M. E. Dominguez
Abstract: This paper examines dollar interventions by the G3 governments since 1989, and the reasons that trader reactions to these interventions might differ over time and across central banks. Market microstructure theory provides a framework for understanding the process by which sterilized central bank interventions are observed and interpreted by traders, and how this process, in turn, might influence exchange rates. Using intra-daily and daily exchange rate and intervention data, the paper analyzes the influence of interventions on exchange rate volatility, finding evidence of both within day and daily impact effects, but little evidence that interventions increase longer-term volatility.
Keywords: Central Bank Interventions; Exchange Rates; Market Microstructure
JEL Codes: F31; G14; G15; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Central bank interventions (E52) | Exchange rate volatility (F31) |
| Intervention days (C41) | Value of the dollar (F31) |
| Interventions (O31) | Longer-term volatility (E32) |
| Trader interpretations and market microstructure (D40) | Market responses (D49) |
| Market expectations and information asymmetry (D84) | Exchange rate volatility (F31) |