Does Foreign Exchange Intervention Signal Future Monetary Policy?

A frequently cited explanation for why sterilized interventions may affect exchange rates is that these interventions signal central banks' future monetary policy intentions. This explanation presumes that central banks in fact back up interventions with subsequent changes in monetary policy. We empirically examine this hypothesis using data on market observations of U.S. intervention together with monetary policy variables, and exchange rates. We strongly reject the hypothesis that interventions convey no signal. However, we also find that in some episodes, intervention signaled changes in monetary policy in the opposite direction of the conventional signaling story. This finding can explain why in some periods exchange rates moved in the opposite direction of that suggested by intervention.

Do Stationary Risk Premia Explain It All? Evidence from the Term Struct

Most studies of the expectations theory of the term structure reject the model. However, the significance of the rejections depend strongly upon the form of the test. In this paper, we use the pattern of rejection across maturities to back out the implied behavior of time-varying risk premia and/or market forecasts. We then use a new technique to test whether stationary risk premia alone can be responsible for these rejections. Surprisirj1y, this test is rejected for short maturities up to 6 months, suggesting that time-varying risk premia do not explain it all. We also describe hew this method can be used to test other asset pricing relationships.

Do Expected Shifts in Inflation Policy Affect Real Rates?

This paper presents a new explanation for the negative correlation between ex post real interest rates and inflation found in earlier empirical studies. We begin by showing that there is a strong negative correlation between the permanent movements in ex post real interest rates and inflation. We argue that such a correlation can arise when people incorporate anticipated shifts in inflation policy into their expectations. Under these circumstances, a shift to lower (higher) inflation will lead to systematically higher (lower) ex post real rates. Using new time series techniques we are able to reject the hypothesis that nominal interest rates were unaffected by anticipated switches in inflation policy in the post-war era. To evaluate the impact of these switches, we then calculate the effects of inflationary expectations upon real rates using a Markov switching model of inflation. Inflation forecasts based upon the estimates of this rational model behave similarly to inflation forecasts from the Livingston survey. When ex ante real interest rates are identified with the Markov models of inflation, we find that ex ante real interest rate does not contain permanent shocks, nor is it related to permanent shocks in inflation.

Trends in Expected Returns in Currency and Bond Markets

Under conventional notions about rational expectations and market efficiency, expected returns differ from the actual expost returns by a forecast error that is uncorrelated with current information. In this paper, we describe how small departures from conventional notions of rational expectations and market efficiency can produce trends in excess returns. These trends are in addition to the trends typically found in the level of asset prices themselves. We report strong evidence for the presence of additional trends in excess foreign exchange and bond returns. We also estimate the additional trend component in excess returns on foreign exchange and find that it varied between -.8% and 1% for one month returns and between -6% and 8% for three month returns.

Occasional Interventions to Target Rates

This paper develops a model of central-bank intervention based upon a policy characteristic of foreign-exchange interventions by the United States, Germany, and Japan in the late 1980\u27s and evaluates it empirically. Central bankers intervene with greater intensity as rates deviate from target levels, but they also try to stabilize rates around current levels. The model is estimated using exchange rates and data based upon observed central-bank interventions. Interestingly, the estimates of the model are consistent with the predictions of the theoretical model for both the deutsche-mark/dollar rate and, less strongly, for the yen/dollar rate

Why Doesn\u27t Society Minimize Central Bank Secrecy?

Societies have incentives to design institutions that allow central bank secrecy. This paper illustrates two of these incentives. First, if society tries to constrain secrecy in one way, central bankers will try to regain lost effectiveness by building up secrecy in other ways. Therefore, we may wind up accepting types of secrecy that appear preventable because reducing them would lead to higher costs. Second, if the social trade-offs between policy objectives change over time, the public may directly prefer greater central bank secrecy so that it will be surprised with expansionary policies when it most desires them

Stochastic Regime Switching and Stabilizing Policies within Regimes

This paper describes a class of stochastic stabilizing policies within asset price regimes; that can be easily incorporated into the framework of regime swtiching recently proposed by K. A. Froot and M. Obstfeld. In contrast to previous treatments of market-driven fundamentals within the regime, authorities stochasstically counteract movements in these fundamentals before asset prices reach boundary points. This paper describes how the stabilizing intra-regime intervention policies can be used to characterize the behaviour of monetary authorities before fixing an exchange rate, as in the cases studied by R. P. Flood and P. Garber. An intervention policy within target zone bands consistent with empirical evidence is also a member of this class of policies. Furthermore, the stylized features of these intervention policies may be matched to actual data in a natural way

Are Foreign Exchange Intervention and Monetary Policy Related and Does It Really Matter?

The relationship between foreign exchange intervention and monetary policy underlies the question of whether sterilized interventions can affect the exchange rate. In this article, I examine this relationship using data on U.S. foreign exchange interventions from 1985 to 1990, recently made publicly available. I examine whether interventions could be viewed as signaling changes in future monetary policy variables. I also consider whether changes in monetary policy may induce interventions in an effort by central bankers to lean against the wind of exchange rate movements. Interestingly, I find evidence both that interventions help predict monetary policy variables and that monetary variables help predict interventions

What Can Explain the Apparent Lack of International Consumption Risk Sharing?

Recent research in international business cycles finds that international consumption comovements do not match the risk-sharing predictions of standard complete markets models. In this paper, I ask whether two different types of explanations can help explain this result: (1) nonseparabilities between tradables and nontradable leisure or goods and (2) the effects of capital market restrictions on consumption risk sharing. I find that risk sharing cannot be resolved by either explanation alone. However, when I allow for both nonseparabilities and certain market restrictions, risk sharing among unrestricted countries cannot be rejected. This evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries