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Erschienen in:
2012 | OriginalPaper | Buchkapitel
The Effects of Forex Intervention: A Simultaneous Equations Model
verfasst von : Feng Han, Chi Xie
Erschienen in: Advanced Intelligent Computing Theories and Applications. With Aspects of Artificial Intelligence
Verlag: Springer Berlin Heidelberg
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The Forex intervention is a main instrument to restrain the unexpected float of exchange rate. This paper constructs a simultaneous equations model (SEM) with the central bank reaction function and return of exchange rate to address the effects of Forex intervention. We find that the lagged intervention is a valid and rational instrumental variable to correct this simultaneity bias of Forex intervention and volatility. We also find that BoJ Forex intervention is more effective in “leaning with the wind” than in “leaning against the wind” condition, but unavoidably increases the volatility in either case, and consequently brings more financial risk.