Realignments of target zone exchange systems: what do we know?

This article surveys recent work on forecasting realignments and estimating the credibility of target zones. The literature finds that realignments are somewhat predictable from readily available information such as interest rates and position of the exchange rate within the band. The relationship between realignment expectations and macrovariables is weak and uncertain. Realignments are said to "surprise" policy makers and market participants; they can only be predicted a short time before they happen. Further work on the formation of expectations would be an important contribution to future research in this area. Additionally, the role of the U.S. dollar in ERM realignments is often noted but has not yet been incorporated into the estimation techniques.Foreign exchange rates

The giant sucking sound: did NAFTA devour the Mexican peso?

Five years of economic reforms had made Mexico a model for other developing nations by the end of 1993, when Mexico was preparing to enter into the North American Free Trade Agreement (NAFTA) with Canada and the United States. But less than a year later, in December 1994, Mexico experienced a severe financial crisis, forcing it to borrow from the IMF and the United States. Some commentators blamed the enactment of NAFTA for the devaluation of the peso and the ensuing economic turmoil in Mexico, with some calling for renegotiation or even repeal of the agreement. Author Christopher J. Neely examines the relationship between NAFTA and the 1994 peso crisis and raises some provocative questions: did NAFTA cause or exacerbate the devaluation of the peso? or did NAFTA help alleviate some of the consequences of the crisis?North American Free Trade Agreement ; Mexico ; Capital movements ; Devaluation of currency ; Peso, Mexican

The difference between currency manipulation and monetary policy

But because this [Chinese] exchange rate policy is externally focused and relies heavily on regulations, which restrain normal market forces, it is reasonable to say that the policy constitutes currency manipulation for purposes of gaining an advantage in trade.International economic relations ; Foreign exchange

China's strategic petroleum reserve: a drop in the bucket

China ; Strategic Petroleum Reserve ; Petroleum industry and trade

The great foreign exchange intervention of 2011

In response to volatile market conditions, the G-7 financial authorities announced late on March 17 that they would jointly intervene the next day to reduce the value of the yen, citing concerns about “excess volatility and disorderly movements.” The yen immediately depreciated and traded with much less volatility in the subsequent week.Foreign exchange ; Yen, Japanese

Technical analysis and the profitability of U.S. foreign exchange intervention

This article reconciles an apparent contradiction found by recent research on U.S. intervention in foreign exchange markets. LeBaron (1996) and Szakmary and Mathur (1997) show that extrapolative technical trading rules trade against U.S. foreign exchange intervention and produce excess returns during intervention periods. Leahy (1995) shows that U.S. intervention itself is profitable over long periods of time. In other words, technical trades make excess returns when they take positions contrary to U.S. intervention - U.S. intervention itself is profitable, however. This article will first present recent research on these subjects. Then it will discuss how differing investment horizons and varying returns and position sizes may reconcile these facts.Foreign exchange - Law and legislation

Options on economic data

Options (Finance) ; Economic forecasting

Target zones and conditional volatility: the role of realignments

This paper examines the relationship between the conditional volatility of target zone exchange rates and realignments of the system. To investigate this question, modified jump diffusion Generalized Autoregressive Conditional Heteroskedasticity (GARCH) and absolute value GARCH models are fit to six exchange rates of the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). Time-varying jump probability and absolute value GARCH models are effective in improving the fit of jump-diffusion models on target zone data. There is some evidence that conditional volatility is higher around the periods of realignments.Foreign exchange rates ; European Monetary System (Organization)

The Federal Reserve responds to crises: September 11th was not the first

A primary purpose of the Federal Reserve Act of 1913 was to prevent banking panics by establishing the Federal Reserve System to function as a lender of last resort. Other types of financial crisis require similar response, however, and the Federal Reserve has repeatedly used its capacity to generate liquidity to insulate the economy from crises in financial markets. The Fed's response to the terrorist attacks of September 11, 2001 is the most recent example of this. This paper reviews the Fed's responses to crises and potential crises in financial markets. The cases of the stock market crash of 1987, the Russian default and the September 11th attack are studied.Money supply ; Monetary policy

An analysis of recent studies of the effect of foreign exchange intervention

Two recent strands of research have contributed to our understanding of the effects of foreign exchange intervention: (i) the use of high-frequency data and (ii) the use of event studies to evaluate the effects of intervention. This article surveys recent empirical studies of the effect of foreign exchange intervention and analyzes the implicit assumptions and limitations of such work. After explicitly detailing such drawbacks, the paper suggests ways to better investigate the effects of intervention.Foreign exchange ; Time-series analysis