PDF《The Practice of Central》

FEDERAL RESERVE BANK OF ST.

LOUIS MAY/JUNE

2001 1 The Practice of Central Bank Intervention: Looking Under the Hood Christopher J. Neely T here has been a long and voluminous litera- ture about official intervention in foreign exchange markets. Official intervention is generally defined as those foreign exchange trans- actions of monetary authorities that are designed to influence exchange rates, but can more broadly refer to other policies for that purpose. Many papers have explored the determinants and efficacy of intervention (Edison, 1993;

Sarno and Taylor, 2000) but very little attention has been paid to the more pedestrian subject of the mechanics of foreign exchange intervention like choice of markets, types of counterparties, timing of intervention during the day, purpose of secrecy, etc. This article focuses on the latter topics by reviewing the motivation for, methods, and mechanics of intervention. Although there apparently has been a decline in the frequency of intervention by the major central banks, reports of a coordinated G-7 intervention to support the euro on September 22, 2000, remind us that intervention remains an active policy instru- ment in some circumstances. The second section of the article reviews foreign exchange intervention and describes several meth- ods by which it can be conducted. The third section presents evidence from

22 responses to a survey on intervention practices sent to monetary authorities. TYPES OF INTERVENTION Intervention and the Monetary Base Studies of foreign exchange intervention gen- erally distinguish between intervention that does or does not change the monetary base. The former type is called unsterilized intervention while the latter is referred to as sterilized intervention. When a monetary authority buys (sells) foreign exchange, its own monetary base increases (decreases) by the amount of the purchase (sale). By itself, this type of transaction would influence exchange rates in the same way as domestic open market purchases (sales) of domestic securities;

however, many cen- tral banks routinely sterilize foreign exchange operations―that is, they reverse the effect of the foreign exchange operation on the domestic mon- etary base by buying and selling domestic bonds (Edison, 1993). The crucial distinction between sterilized and unsterilized intervention is that the former constitutes a potentially useful indepen- dent policy tool while the latter is simply another way of conducting monetary policy. For example, on June 17, 1998, the Federal Reserve Bank of New York bought $833 million worth of yen (JPY) at the direction of the U.S. Treasury and the Federal Open Market Committee. In the absence of offsetting transactions, this transaction would have increased the U.S. mone- tary base by $833 million, which would tend to temporarily lower interest rates and ultimately raise U.S. prices, depressing the value of the dol- lar.1 As is customary with U.S. intervention, how- ever, the Federal Reserve Bank of New York also sold an appropriate amount of U.S. Treasury securities to absorb the liquidity and maintain desired conditions in the interbank loan market. Similarly, to prevent any change in Japanese money market conditions, the Bank of Japan would also conduct appropriate transactions to offset the rise in demand for Japanese securities caused by the $833 million Federal Reserve pur- chase. The net effect of these transactions would be to increase the relative supply of U.S. govern- ment securities versus Japanese securities held by the public but to leave the U.S. and Japanese money supplies unchanged. Fully sterilized intervention does not directly affect prices or interest rates and so does not influ- ence the exchange rate through these variables as ordinary monetary policy does. Rather, sterilized intervention might affect the foreign exchange market through two routes: the portfolio balance channel and the signaling channel. The portfolio Christopher J. Neely is a senior economist with the Federal Reserve Bank of St. Louis. The author thanks the monetary authorities of Belgium, Brazil, Canada, Chile, the Czech Republic, Denmark, France, Germany, Hong Kong, Indonesia, Ireland, Italy, Japan, Mexico, New Zealand, Poland, South Korea, Spain, Sweden, Switzerland, Taiwan, and the United States for their cooperation with this study. The author thanks Michael Melvin and Paul Weller for discussions about the survey and Hali Edison, Trish Pollard, and Lucio Sarno for helpful comments. Mrinalini Lhila provided research assistance. This article was originally published in Central Banking (November 2000, XI(2), pp. 24-37;