Does central bank intervention stabilize foreign exchange rates?

Since the adoption of a flexible exchange rate system in 1973, central banks of most industrialized countries have continued to intervene in foreign exchange markets. One reason is that exchange rate volatility has increased. To reduce volatility, many European countries have agreed to keep exchange rates within a band around a target exchange rate, implementing this policy by intervening in foreign exchange markets when necessary. Even without an explicit exchange rate commitment, countries such as the United States and Japan have intervened in foreign exchange markets to help stabilize exchange rates.> Opinions differ on whether central banks can stabilize exchange rates. Some analysts believe central bank intervention can reduce exchange rate volatility by stopping speculative attacks against a currency. Other analysts, though, believe central bank intervention may increase volatility if the intervention contributes to market uncertainty or encourages speculative attacks against the currency.> Bonser-Neal presents empirical evidence on this controversy. Her evidence suggests that central bank intervention does not generally reduce exchange rate volatility. Rather, central bank intervention typically appears to have had little effect on volatility.Banks and banking, Central ; Foreign exchange rates

Does the yield spread predict real economic activity? : a multicountry analysis

This article evaluates the ability of the yield spread to forecast real economic activity in 11 industrial countries. The first section of this article defines the yield spread and explains why the spread may be a useful predictor of real economic activity. The second section describes the data and criteria used to evaluate the predictive power of the yield spread. The third section examines whether yield spreads have reliably forecast real economic activity in the 11 countries, using several measures of real economic activity and alternative forecast horizons. The empirical results indicate the yield spread is a statistically and economically significant predictor of real economic activity in several industrial countries besides the United States. In addition, the yield spread forecasting model generally outperforms two alternative forecasting models in predicting future real GDP growth.Economic conditions - United States ; Interest rates ; Forecasting ; Gross domestic product

Monetary Policy News and Exchange Rate Responses: Do Only Surprises Matter?

This paper shows that exchange rates respond to only the surprise component of an actual US monetary policy change and that failure to disentangle the surprise component from the actual monetary policy change can lead to an underestimation of the impact of monetary policy, or even to a false acceptance of the hypothesis that monetary policy has no impact on exchange rates. This finding implies that there is a need for reexamining the empirical analyses of asset price responses to macro news that do not isolate the unexpected component of news from the expected element. In addition, we add to the debate on how quickly exchange rates respond to news by showing that the exchange rates under study absorb monetary policy surprises within the same day as the news are announced

The Effect of Global Financial Markets on Businesses

This paper reviews the theory and evidence on the effects of globalization of financial transactions on businesses. Two important benefits are identified. First, globalization reduces a company’s cost of capital. Second, globalization improves corporate governance so that manager actions are better aligned with shareholder interests. This improvement in corporate governance further contributes to a reduction in a firm’s cost of capital