Central bank intervention and foreign exchange markets

• Main Authors: Dave Seerattan, Nicola Spagnolo
• Format: Article in Journal/Newspaper
• Language: unknown
• Subjects: Iceland
• Online Access: http://www.tandfonline.com/doi/abs/10.1080/00036840902817789

In this article we examine the sensitivity of the foreign exchange market to central bank intervention. Using a time varying Markov switching model we separate periods of relatively stable market conditions from volatile periods and look at the dynamic of the causality effect under different market conditions. The analysis is conducted for three developing markets, namely Croatia, Iceland and Jamaica and one developed market, Australia, for comparative purposes. We show that direct intervention affects the probability of switching between states in the developed market but has little or no effect in the developing markets reviewed. We argue that this is due to specific intervention practices rather than market characteristics. Additionally, we find that intervention purchases and sales tend to have different effects. Monetary policy is also found to impact the probability of transitioning from one market state to another, sometimes detracting from the strength of the influence of direct intervention on the transition probabilities.