Does foreign exchange intervention reduces the exchange rate volatility?

Abstract

We report that the Japanese foreign exchange intervention reduces the yen/US dollar exchange rate volatility. Numerous studies generally concluded that foreign exchange interventions increased exchange rate volatility using daily data. The results of our article using monthly data are contrary to results of previous studies.

Acknowledgements

I am grateful for constructive comments and suggestions by Seiichi Fujita and Ryuzo Miyao of Kobe University. The remaining errors are my own.

Notes

¹Refer to Sarno and Taylor (2001, 2003), Taylor (1994) for a recent survey of the literature. Also see Taylor (2004, 2005)

²Article 40, Section 2, The Bank of Japan Law.

³The Japanese intervention data is obtained from the Japanese Ministry of Finance (http://www.mof.go.jp/english/e1c021.htm).

⁴The data is from the homepage for Bank of Japan.

⁵We use the EGARCH model without asymmetric term in this article.