Journal Article

The dynamic impact of FX interventions on financial markets

Authors

  • Lukas Menkhoff
  • Malte Rieth
  • Tobias Heidland
Publication Date

Evidence on the effectiveness of FX interventions is either limited to short horizons or hampered by debatable identification. We address these limitations by identifying a structural vector autoregressive model for the daily frequency with an external instrument. Generally, we find, for freely floating currencies, that FX intervention shocks significantly affect exchange rates and that this impact persists for months. The signaling channel dominates the portfolio channel. Moreover, interest rates tend to fall in response to sales of the domestic currency, whereas stock prices of large (exporting) firms increase after devaluation of the domestic currency.

Kiel Institute Experts

Info

JEL Classification
F31; F33; E58
DOI
10.1162/rest_a_00928

Key Words

  • currency
  • Foreign Exchange
  • foreign exchange intervention
  • Interest rates
  • Stock markets
  • structural VAR