1

CENTRAL BANK INTERVENTIONS IN INDUSTRIALIZED COUNTRIES:

A CHARACTERIZATION BASED ON SURVEY RESULTS

Christelle LECOURT*, Helene RAYMOND♦

a CEREFIM, University of Namur, Namur, Belgium.

b SEGMI, University of Paris X, Nanterre, France.

This version: May 2005

ABSTRACT

This paper presents the findings from a survey on central banks’ FOREX intervention

practices in industrialized countries over the last decade. The answers of responding

monetary authorities are examined in respect of available data and literature. Our

findings indicate that interventions usually take place during normal working hours

while central banks show some preference for dealing with major domestic banks.

Correction or prevention of long-term misalignments of exchange rates with their

fundamental values and, to a lesser extent, the reduction of exchange rate volatility is

the first motive given for intervention. The signalling effect of interventions is

consistently put forward as the main channel through which interventions work.

JEL CODE: F31; C42.

KEY WORDS: Central banks; interventions; exchange rate; survey.

* Correspondence to: Christelle Lecourt, CEREFIM, University of Namur, 8 Rempart de la Vierge, B-5000, Namur, Belgium. E-mail: christelle.lecourt@fundp.ac.be. ♦ E-mail: helene.raymond-feingold@u-paris10.fr.

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1. INTRODUCTION

The question of the effectiveness of central bank interventions (CBI) has been studied at

length over the last thirty years. The CBI capacity to move the exchange rate is

regularly called into question by the foreign exchange analysts who put forward the

increasing amounts traded on the market. Numerous empirical studies corroborate the

doubt concerning the CBI effectiveness: the main findings are that foreign exchange

interventions seem to increase volatility rather than to reduce it, whereas exchange rate

levels frequently move in the wrong direction.1 The empirical literature has shown

however that the kind of operation conducted in the foreign exchange market is relevant.

Several studies find that interventions done in coordination with other central banks

have a larger impact than unilateral interventions conducted by a single central bank

(see Catte et al., 1994; Beine et al., 2003 or Nagayasu, 2004). Some studies distinguish

between the effects of public interventions reported in the press and the effects of

“secret” interventions (Dominguez and Frankel, 1993; Osterberg and Humes, 1993;

Humpage, 1999, Beine and Lecourt, 2004). Quite recently, the academic literature on

CBI has also turned its attention to the effects of Central Banks’ communication policy.

Several studies conclude that Central Banks’ statements - accompanied or not by actual

interventions - can have a stabilizing effect on the exchange rate (Fatum and

Hutchinson, 2002; Jansen and de Haan, 2003; Beine et al., 2004; Fratzscher, 2004).

Despite the weakness of the evidence supporting the positive effect of

interventions, major central banks continue to stay active on the foreign exchange

market (FOREX), as attested by the very recent and frequent unilateral interventions of

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the Bank of Japan in recent years, which aimed to weaken the yen against the euro or

the dollar. At this stage, one can only wonder as to what the real central bank

motivations for intervening are: central banks’ aims seem sometimes to be more

complex than simply trying to impact on the current level and volatility of the exchange

rate. Similarly, one wonders to what extent the CBI effectiveness does not depend on

the intervention methods: sterilized or non-sterilized interventions; coordinated or

unilateral interventions, with large or small amounts; reported or secret interventions; at

which frequency and so on.

An obvious possibility for the clarification of the literature on central bank

motivations for and methods of intervening on the FOREX is to interview central banks

on their practices and motives. In this respect, the work of Neely (2001) is the first (and

to the best of our knowledge the only work) that analyses survey data, which was

obtained directly from the central banks.

This survey focuses on several issues: the way in which central banks intervene

(the frequency and the size of interventions, the time of intervention and the market in

which it takes place, the counterparts with whom monetary authorities deal with), the

kinds of intervention (unilateral or coordinated, reported or secret and sterilized or

nonsterilized), the channels through which central banks expect to act on the FOREX,

the aims of the interventions and central banks’ viewpoint on the effectiveness of their

interventions. The examination of central banks’ responses in the light of available data

on interventions as well as existing literature, allows us to draw conclusions on the

characteristics of interventions in the last decade.

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Our study differs from the survey previously conducted by Neely (2001) in three

respects. Firstly, our sample of responding central banks is different2: this study is

focused on the intervention practices of central banks in industrialized countries.3

Secondly, different aspects of the intervention practices that are treated here were not

covered in Neely’s study (2001). These aspects involve questions regarding the amount

of interventions, the channel through which interventions act on the market and the

different means of increasing the effectiveness of interventions. Thirdly, the periods

considered in the two surveys do not quite match.4

This paper is organized as follows: foreign exchange interventions are defined and

classified in Section 2; Section 3 summarizes the theoretical channels through which

interventions can work; our results and comments are displayed in Section 4 while

Section 5 concludes.

2. DEFINITION OF THE DIFFERENT KINDS OF INTERVENTIONS

Intervention in the foreign exchange market is generally defined as the official purchase

and sale of foreign currencies made by the monetary authorities in order to influence

future currency changes. This definition restricts the motives for which a monetary

authority can intervene. For instance, it could intervene in order to adjust the portfolio

of foreign exchange reserves or to signal its commitment to a new monetary policy. The

primary motive of these kinds of dealings is not to impact on exchange rates dynamics,

even if they do move exchange rates. In our survey (Section 4) we do not exclude these

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“interventions”, we attempt instead to ascertain if the secrecy of some interventions can

be explained by such motives. Note that we only study direct interventions on the

foreign exchange market, excluding monetary policy changes such as interest

adjustments, even if they were made in order to support an exchange rate target. This

restriction is justified by the difficulty in ensuring that a monetary change was

exclusively designed to reach an exchange rate target. However, as it will be recalled in

the following subsection, exchange rate policy and monetary policy are tightly linked.

2.1 Sterilized versus non-sterilized interventions

The above definition of a direct FOREX intervention can be further refined to

distinguish between sterilized and non-sterilized interventions. In the case of sterilized

interventions, the action of trading reserves is coupled with an adjustment in interest

rates or any monetary instrument enabling the monetary base to be left unchanged. The

sterilization of intervention on the domestic quantity of money implies that the central

bank is implicitly leading an exchange rate policy, while the monetary policy remains

unchanged. In the case of non-sterilized interventions, given that the monetary base is

modified in proportion to the amount of currency reserve trades, the implicit exchange

rate policy is coupled with a change in the monetary policy. This last kind of

intervention should have more lasting effects on exchange rates levels, as the monetary

policy effect strengthens the direct effects of the purchases or sales on the FOREX.

2.2 Unilateral versus concerted interventions

Concerted interventions are interventions carried out simultaneously by two or

more central banks in support of (or against) the same currency. In fixed exchange rate

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systems, interventions are designed to restore exchange rates to their targets and they

usually imply some coordination between the monetary authorities participating in the

exchange rate agreement. In floating systems, however, central banks are under no

obligation to support an intervention. According to Dominguez and Frankel (1993), a

possible motivation for coordination is therefore the spillover effect of an intervention:

it causes a change in the external value of one currency but also a change in the relative

value of other currencies. If central banks believe that the spillover effect is of

significant magnitude, they have an incentive to coordinate their intervention

operations, which could eventually lead to some coordination in future monetary

policies.

According to empirical findings (Dominguez, 1990; Dominguez and Frankel, 1993;

Catte et al., 1994; Beine et al., 2003; Nagayasu, 2004), coordinated sterilized

interventions are more powerful than non-coordinated interventions in moving the

exchange rate level. The efficiency of coordinated interventions could, besides the

opportunity to intervene for a bigger total amount, be grounded in the signalling effect.

The intervention conveys a signal to the market participants on the forthcoming

monetary policy. If the signalling effect is the major channel through which an

intervention acts, then interventions aimed to support parity should be more effective

when conducted in a concerted manner with other central banks. In that case, signals

sent to the market will be more credible in the sense that “multiple signals will increase

the total amount of inside information conveyed by intervention operations”

(Dominguez and Frankel, 1993, p. 63). It is better for a central bank to use the

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credibility of other central banks in addition to its own in order to strengthen market

participants’ confidence that the signal is a real one.

2.3 Reported versus secret interventions

Intervention operations are frequently reported in newspapers and on wire

services (e.g., Reuters and Bloomberg) and major domestic banks often participate

directly in the intervention operations (see answers to Question 4 in our survey, reported

in Table 1 in the appendix). Therefore the existence of strictly secret interventions is

questionable; the market generally knows when a central bank is intervening (or

whether a central bank is to intervene in the near future), even though current official

data are unavailable. As a matter of fact, Dominguez (1999), in an empirical paper using

high-frequency data, found that some traders know that a central bank is intervening at

least one hour prior to the public release of the information in newswire reports.

Furthermore, far from trying to keep it a secret after the intervention, a growing number

of central banks release, after some delay, summaries of their official intervention

operations.5

Still, there can be a rationale for keeping some secrecy around the timing and/or

amounts of future intervention operations. Firstly, a central bank may prefer not to

disclose its intervention when it is inconsistent with monetary and fiscal commitments.6

Keeping the intervention secret minimizes its signalling effect and maintains the central

bank’s reputation. Another reason for restricting information is to hide the state of the

exchange reserves. The ability of a central bank to maintain the exchange rate depends

on its available foreign exchange reserves. When a central bank intervenes in order to

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restore its available reserves, it will prefer to do so secretly so as not to give away

information. Similarly, the secrecy of interventions intended to counter speculative

attacks helps to hide the state of reserves, increases the riskiness of speculation and

assists in having the interventions mistaken for a change in the trend of the market. A

final reason for secrecy is that a central bank can intervene on the behalf of another

central bank. Secrecy can then be required by the second central bank or be preferred by

the intervening central bank to avoid blurring its monetary policy signals.

All the interventions unreported by the media, however, are not necessarily

secret. Secrecy might not be so easy for a central bank to achieve and information leaks

could be voluntary. Baillie et al. (2000) explain that secrecy depends on the central

bank’s counterparts: if the counterpart is a well known commercial bank, then it is

expected to report to the market the fact that the central bank placed an order.7 On the

other hand, if the central bank operates through major foreign banks, brokers or recent

electronic brokerage system (EBS), it is likely that its intervention will not be reported

to the market. The authors, however, point out that the distinction between reported and

secret interventions is not always clear-cut.8

The empirical literature finds evidence that secret intervention generally increases

exchange rate volatility (Dominguez, 1998) or leaves it unchanged (Beine, Bénassy-

Quéré and Lecourt, 2002a), whereas it has no significant effects on the conditional

mean (Dominguez and Frankel, 1993). According to the well-known signalling channel,

it might be difficult to justify the use of secret interventions. This has led to the so-

called secret intervention puzzle (Sarno and Taylor, 2001). As a matter of fact, the

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drawback of secret intervention is that, by maintaining some uncertainty on its future

policies, the central bank may disturb the market rather than calm it down. According to

Beine et al. (2002), secret interventions should, however, convey no signalling effect, as

few agents are aware of secret interventions, these interventions should increase

exchange rate volatility less than reported interventions. On the contrary, Vitale (1999)

argues that the flow of orders itself is a signal, as (in a microstructure framework) it

reveals some of the private information of the central bank, even when the intervention

is kept secret. Recently, some authors like Evans and Lyons (2001) found a certain

amount of support for effective secret interventions, through the portfolio channel

described in the following section.

3. THE THEORETICAL CHANNELS THROUGH WHICH INTERVENTIONS

ACT ON THE EXCHANGE RATE

There are many theories on the scope of foreign exchange rate intervention.9 However,

economic theory identifies mainly three channels through which interventions can act

on the exchange rate: the monetary channel, the portfolio-adjustment channel and the

signalling channel.10

3.1 The monetary channel

The monetary channel involves non-sterilized foreign exchange interventions.11 In

monetary models of exchange rate determination, if purchases (or sales) of foreign

currency assets are not accompanied by sales (purchases) of domestic currency assets by

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the central bank, these operations should change the relative quantities of domestic and

foreign currencies in circulation and, hence, the parity between the two currencies.

This channel requires that domestic monetary policy is ruled by foreign exchange

policy, which should not be the case in a floating exchange rate regime. But as most

floating exchange rate systems are dirty floats, they can incur periods of unofficial

exchange rate targeting. Furthermore, when monetary and exchange rate policies are

conducted by two separate institutions12, then sterilization of interventions is probably

less automatic. If the same institution is in charge of both policies, interventions should

be sterilized in a floating exchange rate regime. The only exception would be the case

where a non-sterilized intervention is used as a monetary policy instrument to restrict or

expand the domestic quantity of money.

3.2 The portfolio-balance channel

In the 1970s and early 1980s, a new channel by which sterilized interventions

might have an effect on exchange rates, was theorized. The portfolio-balance channel

requires that investors are risk-averse and diversify their portfolios into domestic and

foreign financial securities. Financial markets’ equilibrium requires a risk premium on

the more risky assets to induce risk-averse investors to hold them. In this framework,

sterilized interventions can act on exchange rate dynamics by changing the relative

supplies and risks of domestic and foreign securities. For instance, in order to sterilize a

sale of foreign currency against the domestic currency, the central bank will increase its

purchases of domestic bonds. To be willing to sell some domestic bonds, international

investors must be immediately offered a higher price for these bonds (so the expected

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return and the risk premium on domestic bonds decrease) in foreign currency. As the

domestic interest rate and thus the domestic prices of domestic bonds are kept

unchanged (as is the aim of sterilization), the only way the foreign price of the domestic

bonds can rise is through an appreciation of the domestic currency. On the contrary, a

sterilized purchase of foreign currency against the domestic currency, inducing a sale of

domestic bonds by the central bank, will require a decrease in the prices of domestic

bonds in foreign currency (so the expected return and the risk premium increase) with

the result that the domestic currency has to depreciate.

The portfolio channel predicts that selling foreign currency reserves will

appreciate the domestic currency, whereas increasing reserves should depreciate the

domestic currency. But these usual effects are reached indirectly, through the

adjustment of portfolios and returns to a change in the relative supplies and risks of

domestic and foreign assets. Obstfeld (1982) has shown, however, that in a Ricardian

world, where the private sector “internalizes” government debt and foreign exchange

reserves, a sterilized intervention can be ineffective even in the short term: it does not

change the net wealth level of the private sector, nor its perceived composition.13 Strict

Ricardian equivalence is a strong assumption, but this result casts some doubt as to the

ability of the central bank to manage the exchange rate through the portfolio channel.

With the exception of Dominguez and Frankel (1993), empirical studies find no

evidence that intervention alters exchange rate levels through a portfolio-balance

channel (Rogoff, 1984; Lewis, 1988; Edison, 1993). As remarked by Obstfeld (1989),

the main reason for these bad results is that the intervention amounts, which could

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appear paramount, are rather small when compared to the total daily activity in the

foreign exchange market, even if the birth of the Euro has reduced the foreign exchange

volume of transactions. According to the BIS survey on foreign exchange and

derivatives’ market activity, the daily average of the global foreign exchange market

turnover amounted to 2408 billions of US dollars in April 2004, whereas the value of

the overall world official reserves declared to the BIS by the central banks was 3010

billions of US dollars by the end of 2003. This means that the overall central banks’

official reserves amount to slightly more than one day of trading and that central banks

cannot by direct interventions alone counter a long lasting exchange rate trend.

3.3 The signalling channel

An additional channel through which sterilized interventions may influence

market expectations and the exchange rate is the “signalling channel” (Mussa, 1981).

According to the signalling theory, central banks’ interventions can recover some

efficiency through the signal they convey on future policy. Purchases (respectively

sales) of foreign currencies should signal an expansionary (contractionary) forthcoming

monetary policy. Interventions would be more efficient than simple announcements as

they back the commitment of the central bank to its new policy.14 It is important to

make a distinction between two kinds of signalling. Firstly, a central bank can intervene

in the foreign exchange market to signal the path of its future monetary policy.

Secondly, central banks can use foreign exchange interventions to signal their belief that

the exchange rate is misaligned. This second case implies that monetary authorities have

private information on the fundamental value of a foreign currency and that their aim is

to send this inside information (Humpage, 2000) to the market.

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Under the assumption of highly efficient markets, central bank actions should

act immediately on the exchange rate, by altering expectations in the exchange market

(Mussa, 1981). If the foreign exchange market is highly efficient, in such a way that

new information is immediately taken into account in exchange rates levels, then it

would explain why the exchange rate seems to follow a “fair game” such as:

11 ++ += ttt ss ε with ( ) 01 =+ tt IE ε

where 1+ts , the logged nominal exchange rate at time t+1, equals its value at time t, plus

all unexpected events captured by a random component, 1+tε , called news. This means

the expected change, ( )tt IsE 1+∆ , given all information tI at time t, is always equal to

zero:

( ) ( ) 011 ==∆ ++ tttt IEIsE ε

In the signalling theory, exchange rate levels are likely to be disturbed in the

short term only if the information received by traders is strictly non-anticipated. When a

central bank intervenes in the foreign exchange market, it conveys a signal which

indicates, for instance, a change in the future monetary policy. If this signal is expected

by the market, the information given by the signal is already incorporated in the

previous day’s spot quote. By contrast, if the signal is “new” (e.g. unexpected), it will

immediately change the current exchange rate value. In other words, the signalling

effect will only be effective if the market did not already anticipate a change in the

monetary policy. Furthermore, the intervention effectiveness on the exchange rate (level

or volatility) will depend on whether the signal sent by the central bank is perceived by

the market as unambiguous and credible (Dominguez, 1998).

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The signalling channel is largely acknowledged as the main way in which

interventions impact on foreign exchange markets (see, among others, Gosh, 1992;

Dominguez and Frankel, 1993; Lewis, 1995; Kaminsky and Lewis, 1996 or Vitale,

1999).

4 THE SURVEY RESULTS

Thirteen of the twenty central banks contacted responded to our survey. Table 1 in the

appendix reports the questions, answers and the list of responding monetary authorities.

To ensure the confidentiality of individual answers, we do not report the identity of the

respondent for each answer, except for the Banks of Japan and Sweden, for which we

use public information. In the case of Japan, public information on interventions

released by the Japanese Ministry of Finance enables us to answer Questions 1, 2 and 3

of our questionnaire.15 The Swedish central bank responded to our survey by sending

an official report on its intervention policy, which enables us to answer 5 out of the 13

questions asked.16 We report these inferred “answers” in Table 1 (appendix) but

separately because they are public knowledge. In Table 1 the figures on the number of

respondents do not always amount to thirteen (excluding Japan which did not officially

respond, but including Sweden) for each question: some respondents left questions

unanswered17, while others chose more than one answer, an option left open for some

questions.

4.1 On the frequency and the magnitude of interventions

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Questions 1 and 2 inquire about the frequency and the magnitude of

interventions. The 13 authorities surveyed frequently intervened on the foreign

exchange market in the last decade; according to the answers to Question 1, nearly 70%

of the respondents intervened more than fifty times (one-off or repeated interventions).

As for the magnitude of intervention: 80% of the respondents declare that their highest

intervention amount of the last decade was above one billion of USD while 20%

(including the Bank of Japan) declare an amount of more than ten billions of USD.

We have compared these results with the official intervention data available for

the Federal Reserve, the Bundesbank and the Bank of Japan. According to the data

reported in Table 2 in the appendix, these three central banks pursued active

intervention policies in the nineties and more specifically the Bank of Japan over the

last years. As a matter of fact, the Japanese authorities intervened 338 times on the

USD/YEN between 1992 and 2004, 128 of these interventions taking place during the

short period 2003-2004, that is almost twice more than between 1995 and 2002. The

Fed and the Bundesbank intervened repeatedly during the period 1990-199618. The

Bundesbank was very active on the FOREX in 1991-1992, during the E.M.S. crisis,

while the Fed intervened in 1994-1995 against the DEM and the YEN. Otherwise,

except for the recent concerted G-7 interventions on 22nd September 2000 and the

unilateral E.C.B. interventions in November 2000, both aimed at supporting the Euro,

the Bundesbank (or the ECB) and the Fed have not intervened in the FX market since,

respectively, 1996 and 1998.19

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Table 3 in the appendix reports the intervention amounts for these three major

central banks. It shows that the average intervention size rose dramatically in the

nineties, at least for these central banks. Indeed, the average amounts of central bank

interventions reached unprecedented highs in the last decade, especially in the late

1990s and early 2000s. In Japan, the arrival of Dr. Sakakibara at the head of the

ministry of finance in June 1995 (until 2002) involved a radical change in the

intervention policy: interventions are practiced in a more visible manner, in the sense

where they are less frequent than in the early 1990s but the invested amounts are much

larger, with an average of 5.57 billions of USD. The Japanese intervention of 10th April

1998 is probably amongst the largest intervention recorded for one day with sales of

about 20 billions of USD. The concerted intervention on the Euro in September 2000

has been the most important carried out by the Fed and the ECB in the last decade: it

involved 1.5 billions of USD on the part of the Federal Reserve20 and the estimated

E.C.B intervention was around 3 billions of USD (Gros and Ritter, 2000).21 Note that

this increase in the average amounts involved in interventions follows the huge rise in

the daily transactions volume in the FOREX, documented by BIS surveys.22

The available data confirm the result of our survey. Foreign exchange

intervention remained an active policy tool in the last decade, with the decrease in the

frequency of intervention of some central banks being compensated by a huge increase

in their average intervention size. But the comparison between the survey results and

external data on FX interventions also reveals disparities between central bank practices

and an evolution of intervention methods during the last decade. Since the mid nineties

the Bank of Japan, the Bundesbank and the Federal Reserve opted for a policy of less

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frequent but larger (on average) interventions.23 Central banks are increasingly aware

that to be effective, through the signalling and (perhaps) the portfolio channels,

interventions must involve significant amounts. As noticed by Kim, Kortian and Sheen

(2000), the response of the foreign exchange market “may depend on whether the

intervention on the day is large enough to have a significant effect on the current

trend”. The size of interventions must be large enough in order to be credible

(signalling channel) or to involve significant portfolio effects.

4.2 How and when are interventions conducted?

In answer to Question 3, nearly 93% of the respondents have reported that their

interventions are always sterilized, i.e. they do not change the monetary base. This

means that intervention is not used as a tool for monetary policy; a result which differs

from the one found by Neely (2001), whose survey includes central banks from Latin

America and Asia.24

Central banks have a choice as regards their counterparts. According to the

answers given to Question 4, they seem to have a preference for dealing with major

domestic banks (80% of respondents), probably in order to ensure liquidity and to

achieve high visibility, but they sometimes deal (in a decreasing preference order) with

major foreign banks, brokers or other central banks acting as agents. These answers are

consistent with the view that the main channel through which foreign exchange

intervention works is the signalling channel.

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Answers to Question 5 show that most interventions take place during normal

working hours, in the morning or afternoon, when the domestic Forex market is open

and the market liquidity on the home currency is rather high, and very seldom outside

business hours (lunch time, evenings, week-ends or holidays). Generally, answers to

Questions 4 and 5 are consistent with the results reported by Neely (2001), as well as

with the pre-eminence of the signalling channel.

Our results in this field can be complemented by information gathered from the

literature on foreign exchange interventions. According to Goodhart and Hesse (1993),

the U.S. monetary authorities appear to favour intervention while the European markets

are still open. There could be some tactical tendency for central banks to intervene when

the European and U.S. markets overlap. The Bank of Australia, however, has publicly

stated that it prefers to intervene outside of normal business hours (Rankin, 1998).

Overall, whether the preferred timing of intervention is in the morning, afternoon or at

lunchtime reflects mostly the difference between the time zones.25

4.3 What are the motivations for secret interventions ?

The main reasons invoked by the surveyed central banks for keeping

interventions secret (Question 6) are either to minimize the effect on the market (30% of

respondents) and/or to counter speculative attacks (30% of respondents). The first

motive can apply in cases where the central bank’s interventions aim to reallocate their

currency reserves or when the exchange rate policy is inconsistent with the monetary

policy. As a matter of fact, central banks sometimes trade in FX markets simply to

adjust their portfolio of foreign exchange reserves. Such actions are not designed to

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change exchange rate levels, therefore they do not exactly match the usual definition of

FX intervention. The second motive can apply in cases where the central bank does not

wish to disclose too much information on the current state of its reserves or wants to

surprise speculators. Therefore the second motive seems more relevant for official or

unofficial target zone systems. Sometimes, however, both motives could apply: keeping

interventions secret in order to counter speculative attacks and minimize their effects is

relevant in cases where visible interventions are inappropriate, as they might draw the

market attention to inconsistencies.26

According to some recent studies (Fatum and Hutchinson, 2002; Jansen and de

Haan, 2003; Fratzscher, 2004; Beine et al., 2004), there is a tendency during the recent

years towards more transparent intervention policy: communication policy (“oral

intervention”) has been acknowledged to play a significant role in enhancing the

effectiveness of the exchange rate policy with or without actual intervention in the

FOREX. An illustration of the transparency policy practiced by major central banks is

the release of official intervention data to the public, albeit with a lag. For instance, the

Bank of Japan recently made its official intervention data freely available to the public.

Furthermore, the Fed and the Bank of Canada confirm all intervention operations and

the Fed gives the amounts in quarterly reports. The Bundesbank repeatedly dispatched

its intervention data to economists for research purposes.27

In this context, secret interventions are not anymore an instrument valued by

central banks. As a matter of fact, available data on the interventions of the Bundesbank

and the Federal Reserve show that these two major central banks made almost no secret

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interventions28 during the period 1991-2004 (Table 4 in appendix).29 One exception is

the Bank of Japan which has intervened frequently in a discreet way during the period

2003-2004, with more than 80% of secret interventions.30 This tendency towards more

advertised interventions is consistent with the theory according to which central banks

increasingly try to act through the signalling channel. If its exchange rate target is

sustainable31, a central bank must disclose its intentions and actions with a maximum of

transparency in order to avoid sending an ambiguous signal to the market.

4.4 What are the motivations for intervention?

For 90% of the central banks responding to Question 7 most interventions during

the last decade were intended to “lean against the wind”, e.g. to move the exchange rate

in the direction opposite to its current trend. Fewer interventions seem to have been

made to “support the current exchange rate trend” (20% of respondents). Answers to

Question 8 are quite consistent with the results of Question 7, as the first motive given

for intervention in the last decade is “to correct or prevent long-term misalignments of

exchange rates with fundamental values” (about 66% of respondents to Question 8).

The second motive (33% of respondents) given for intervention is “to calm market

disorders or reduce exchange rate volatility”. A third motive given by some central

banks as an explanation for choosing the answer “Other” (25% of respondents), is to

keep exchange rates within the allowed fluctuation margins of a fixed or managed

regime.32

Our survey therefore supports the results found by a number of studies,

according to which central banks “leaned against the wind” in the post-Louvre period

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(Almekinders and Eijffinger, 1993; Dominguez and Frankel, 1993; Baillie and

Osterberg, 1997a,b; Beine et al., 2002a). However, Almekinders and Eijffinger draw a

distinction between the objectives of exchange market interventions in the short,

medium and long-term. In the short-term, the main central bank objective is to “counter

disorderly exchange market conditions” while the medium-term objective is to counter

short-term exchange rate variations which exceed a certain size. Finally, the long-term

objectives consist of reducing the exchange rate misalignment with respect to the

economic fundamentals. Hence, it seems that the primary motives for intervention in the

last decade, those of “leaning against the wind” and correcting misalignments of

exchange rates with fundamental values, were medium and long term objectives, while

the short-term objective of exchange rate volatility reduction was less frequent. The

central banks’ responses are also consistent with the purposes of interventions put

forward in official speeches. Many coordinated interventions were achieved in order to

help the “orderly shift of parities” (1995, speech on April 25th of the finance ministers

and central bank governors of the G-7, Washington).33

4.5 The signalling effect of interventions

The signalling effect of intervention (Question 10) is given by most central

banks as the main channel through which interventions act on the exchange rates (78%

of respondents), while the direct effect of buying and selling reserves is far less

frequently quoted (22% of respondents).34 Central banks do not appear to trust the

effectiveness of the portfolio channel, as none quoted it. For 56% of the responding

central banks, international communication, such as central banks’ governors’ speeches,

are essential to the success of intervention, while for 34% of respondents, the

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effectiveness of the signalling depends on the fact that interventions are carried out in a

concerted manner (Question 11). These answers are consistent with the other results of

the survey. In Sections 4.2 and 4.3 we saw that central banks principally deal with

major domestic banks and generally report interventions, probably in order to maximise

the effect of announcements.

The fact that the intervention amounts recently reached unprecedented highs

(Section 4.1) is consistent with the use of the signalling channel by central banks. The

greater the amount involved, the more credible the commitment of the central bank to

adjust its future policy. Coordinated intervention can also be a useful device to enhance

the signal’s credibility. Available data on coordinated interventions confirm that

concerted interventions remained frequent in the last decade (Table 5, appendix). Since

1991, most interventions by the Fed and the Bundesbank (or the E.C.B.) were made in a

concerted manner.35 For instance, the Fed intervened 21 times on the yen/dollar of

which 17 interventions were coordinated with the BOJ. Furthermore, it intervened 17

times on the DEM (or Euro/USD) with 11 interventions concerted with the Bundesbank

(or the E.C.B). The Bank of Japan appears as an exception; during the total period its

frequent interventions were predominantly unilateral (314 unilateral interventions as

opposed to 24 coordinated ones).

The pre-eminence given by central banks’ responses to the signalling channel is

also consistent with the recent tendency towards increasingly advertised exchange rate

policies: monetary authorities, when intervening, want to send a credible and non-

ambiguous signal on their future monetary policy to the market. Governors’ statements

23

are a good signalling tool as they can enable market participants to better understand the

aims of the intervention (Fatum and Hutchinson, 2002; Jansen and de Haan, 2003;

Fratzscher, 2004; Beine et al., 2004).

4.6 On the effectiveness of interventions

To the delicate question about the duration of the intervention effect on

exchange rates (Question 12), about 71% of respondents answered “other”, while the

remaining 29% said that the effects on average last “between one day and one week”.36

According to Sweden’s central bank report on its intervention policy, the effectiveness

of intervention could stretch to the medium-term, though this term is not precisely

defined. Some respondents explained their choice of the answer “Other” by underlining

that the endurance of the effect of intervention depends greatly on the context of the

intervention operation, its objectives and the underlying market perception of the

exchange rate’s sustainable level and volatility. Neely (2001) found a great dispersion

of answers, indicating disagreement among central bankers. According to the results of

our survey, no consensus exists on the means to enhance the effectiveness of

interventions: for 50% of responding central banks, “several repeated interventions”37

are preferable (Question 9) while for the other 50% “one time interventions involving

large amounts” are better. The question should probably have been worded somewhat

differently, as external data point out that large amounts are becoming the rule. The

credibility of the central bank (Question 13) depends for 58% of respondents on the

“consistency of its communication policy”, and for 42% of respondents on the fact that

the central bank has “a long experience of success in interventions”. One of the central

banks surveyed added that another important issue for central bank credibility in the

24

foreign exchange market is “to have a respected and professional market presence

outside of interventions operations, which would involve regular dealings with a broad

range of market participants”.

The dispersion of answers to Questions 9 and 13 and the reluctance to answer

Question 12 regarding the effectiveness of interventions are understandable in view of

the literature results. The literature review does not provide a strong support in favour of

effectiveness (Edison, 1993; Sarno and Taylor, 2001). Ultimately, the effectiveness of

interventions relies, through the signalling effect, on the central bank credibility in the

FX market. If market participants adjust their exchange rate (volatility or level)

forecasts in line with the exchange rate level/volatility targeted by the intervention,

effectiveness should be ensured. Therefore it would be interesting to check if FX

practitioners’ view of interventions is consistent with central banks aims. Our survey

focused on central banks, but the existing literature casts some light on the market

perception of central bank interventions. Interestingly, Cheung and Wong (2000)

surveyed practitioners in the Asian interbank foreign exchange markets.38 According to

their results, over 60% of the responding practitioners find that intervention increases,

rather than reduces, exchange rate volatility. But more than one half believe that

interventions move exchange rates towards their fundamental values. These results

should be interpreted with caution as the survey is limited to three Asian countries. It

should, however, be noted that these results are consistent with the answers to Question

8 in our survey, according to which the first motive for central bank intervention in the

last decade was to correct long-term misalignments of exchange rate with fundamental

values and, only to a lesser extent, to reduce exchange rate volatility. Therefore, it

25

seems that central banks have enough credibility to make market participants aware that

exchange rates are disconnected from their fundamental values, but at the same time

they have a tendency to increase volatility when they intervene.

5 CONCLUSION

This study displays the findings from a questionnaire sent to central banks of

industrialized countries about their FX intervention operation practices during the last

decade.

The signalling effect is always clearly put forward by central banks as the main

channel through which intervention should work. The central banks’ belief in the pre-

eminence of the signalling channel is consistent with the three other main results of the

survey: 1) the choice of a large sized intervention and the stress on international

communication and concerted interventions as means of ensuring effectiveness; 2) the

preference towards major domestic banks as counterparts could also be linked to a

strategy of maximizing announcement effects; 3) the fact that the majority of the central

banks surveyed seem to find no motivation for secret interventions and often stated that

they do not use them.

The first motive for intervention in the last decade was, according to central

banks responses, to correct or prevent long-term misalignments of exchange rates with

their fundamental values and, but to a lesser extent, to reduce exchange rate volatility.

26

Regarding the effectiveness of interventions, responding central banks often

answered to the effect that it depends strongly on the credibility of the central bank,

which is linked with the consistency of its communication policy and length of

successful experience in interventions.

ACKNOWLEDGEMENTS

We are grateful for financial support from the Institut CDC pour la recherche and for

Central Bankers’ willingness to participate in the survey. Comments by Michel Beine,

Agnes Benassy-Quere and Sebastien Laurent helped us to improve the paper. The usual

disclaimer applies.

27

APPENDIX

Table 1: Summary of Central Banks’ Survey Responses♦

Questions No. of responses

Sweden Japan % **

1. In the last decade, approximately how many interventions have been

conducted by your monetary authority? 12*

less than 10 interventions 3 23.1

between 10 and 20 interventions 1 7.7

between 20 and 30 interventions 0 0

between 30 and 40 interventions 0 0

between 40 and 50 interventions 0 0

more than 50 interventions 8 yes 69.2

2. What are the intervention amount records (for a day or successive intervention days)?

9*

more than 500 million dollars 1 10.0

more than 1 million dollars 5 50.0

more than 5 million dollars 1 10.0

more than 10 million dollars 1 yes 20.0

other 1 10.0

3. Are interventions always sterilised ? 12* yes 11 yes yes 92.8

no 1 7.1

4. Most interventions are conducted with: 10*

major domestic banks 8 80.0

major foreign banks 6 60.0

directly via broker(s) 6 60.0

in cooperation with other central banks 3 30.0

other 1 10.0

5. The interventions usually take place: 11*

on the morning of the business day 9 82.0

on the afternoon of the business day 7 63.6

after normal business days (during lunch time or in the evening) 1 9.1

during holidays or the week-ends 0 0

other 1 9.1

6. What is the main reason for secret interventions : 9*

they are kept secret in order to minimize the effect in the market 3 30.0

28

they are kept secret in order to hide the state of the exchange reserves 0 0

they are kept secret in order to counter speculative attacks 3 yes 30.0

other 5 50.0

7. In the last decade, most interventions intended to: 9*

move the exchange rate in the opposite direction to its current trend 8 yes 90.0

support the current exchange rate trend 2 20.0

8. In the last decade, the first motive for intervention was: 11*

to correct/prevent long-term misalignments of exchange rates with

fundamental values 7 yes 66.7

to calm market disorders (i.e. reduce exchange rate volatility) 4 33.3

to profit from speculative trades 0 0

to adjust the foreign exchange portfolio holdings of the Central Bank 0 0

other 3 25.0

* Number of respondents, excluding the Central Bank of Sweden and the Bank of Japan. As respondents could in some cases choose more than one answer, the total number of respondents (grey line) is not always equal to the sum of the responses (white lines). ** Number of respondents to the questions, including Sweden and Japan (in percentage).

29

Table 1 (continued) : Summary of Central Banks’ Survey Responses

Questions No. of responses

Sweden Japan % **

9. Which is more effective : 6*

several repeated interventions 3 50

… or one-off interventions, but involving large amounts 3 50

10. What is the main channel through which interventions impact on the Forex:

9*

the direct effect of buying and selling reserves 2 22.3

the adjustment of private investors’ portfolios induced by the interventions 0 0

the signalling effect of the intervention 7 77.8

other

11. Which is more important for the effectiveness of the signalling: 8*

the fact that the interventions are carried out in a concerted manner 3 33.3

international communication modalities 5 yes 55.6

other 1 11.1

12. In your opinion, how long does the intervention effect last on exchange rates?:

7*

less than one day 0 0

between one day and one week 2 28.5

one month 0 0

more than one month 0 0

more than one year 0 0

other 5 71.4

13. In your opinion, in order to be credible in the FX market, a central bank must, above all:

12*

speak with one voice 7 58.3

support the trend of the market 1 8.3

have a long experience of success in interventions 5 41.7

intervene in a concerted way with other central banks 2 16.7

other 0 0

* Number of respondents for each question, excluding the Central Bank of Sweden and the Bank of Japan. As respondents could in some cases choose more than one answer, the total number of respondents (grey line) is not always equal to the sum of the responses (white lines). ** % of the number of respondents to the questions, including Sweden and Japan.

♦ List of responding central banks :

Reserve Bank of Australia National Bank of Belgium Denmark Central Bank Deutsche Bundesbank Bank of Canada Bank of England

European Central Bank National Bank of Hungary Central Bank of Ireland Norway Bank Federal Reserve of the United States Swiss National Bank Sweden Central Bank

30

Table 2: Number of official intervention days on the DEM/USD,

EUR/USD or USD/yen

Fed : no. of

intervention daysa

Fed:

in % * Bundesbank no. of

intervention days

Buba :

in % * BOJ : no. of

intervention days

BOJ :

in % *

01/01/85 - 22/02/87 44 7.89 62 11.11 36b 6.45

23/02/87 - 31/12/91 325 13.99 188 14.86 133b 10.51

01/01/92 - 31/12/95 36 1.09 10 0.68 169 16.34

01/01/96 - 31/12/02 2 0.05 4 0.23 41 2.22

01/01/03 - 01/09/04 0 0 0 0 128 28.31

* Interventions days in % of the total number of days of the period. a It includes the number of the Fed interventions both against the EUR/USD and the USD/yen. b Numbers are based on Japanese interventions (on the USD/yen) reported in the Wall Street Journal and the Financial Times.

Table 3: Average amounts of intervention (billions of dollars)a

on the EUR/USD and the USD/yen

Fed Bundesbank BOJ

01/01/85 - 22/02/87 0.18 0.10 na

23/02/87 - 31/12/91 0.29 0.12 na

01/01/92 - 31/12/95 0.88 0.27 0.60

01/01/96 - 31/12/02 2.38b nac 5.57

01/01/03 - 01/09/04 0.00 0.00 2.61

a The average amounts of interventions include dollar purchases and the absolute value of dollar sales and exclude the days where there have been no interventions. b The concerted intervention of September 2000 amount is estimated to have been close to 6 billion USD, of which the Fed contributed 1.5 billions (according to the N.Y. Federal Reserve quarterly report). c The 3 unilateral E.C.B. intervention amounts of November 2000 are unknown. The contribution of the ECB to the concerted intervention of September 2000 on the EUR.USD is estimated to be around 3 billion Euros.

31

Table 4: Percentages of unreported interventions a in the total number of

official interventions

Fedb Bundesbank BOJ

01/01/85 - 22/02/87 52.27 50.00 na

23/02/87 - 31/12/91 29.23 44.15 na

01/01/92 - 31/12/95 0.05 0.00 15.38

01/01/96 - 31/12/02 0.00 0.00 0.00

01/01/03 – 01/09/04 0.00 0.00 82.81 a Defined as official interventions unreported in the media of reference. These are the Financial Times and the Wall Street Journal over 1985-1992 and Reuters news afterwards. b It includes Fed interventions both on the EUR/USD and the USD/yen.

Table 5: Percentages of concerted interventions in the total number of official

interventions

On the USD/Yen On the EUR/USD

Fed BOJ Fed Bundesbank

01/01/85 - 22/02/87 63.64 38.89a 72.73 25.81

23/02/87 - 31/12/91 66.89 74.44a 44.63 42.02

01/01/92 - 31/12/95 80.00 12.42 65 100.00

01/01/96 - 31/12/02 100.00 7.31 100.00 25.00

01/01/03 – 01/09/04 0,00 0.00 0.00 0.00 a Number based on Japanese interventions reported in the Wall Street Journal and the Financial Times.

32

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1 See amongst others: Taylor, 1982; Jurgensen report, 1983; Dominguez and Frankel, 1993; Edison,

1993; Baillie and Humpage, 1992; Connoly and Taylor, 1994; Bonser-Neal and Tanner, 1996; Kaminsky

and Lewis, 1996; Baillie and Osterberg, 1997a,b; Dominguez, 1998; Galati and Melick, 1999; Aguilar

and Nydahl, 2000; Beine et al., 2002.

2 On one hand, our survey includes respondents absent from the study by Neely: the Australian Central

Bank, the Bank of England, the European Central Bank, the Hungarian Central Bank, Norway Central

Bank. On the other hand, Neely’s survey includes central banks absent from ours, which are the central

banks of the following countries: Brazil, Chile, the Czech Republic, France, Hong Kong, Indonesia, Italy,

Japan, New Zealand, Poland, South Korea, Spain, Taiwan. France, Italy and Spain have commissioned

the ECB to voice their answers in our Survey. Japan seemingly relies on its new policy of foreign data

intervention releases (currently available on www.mof.go.jp) and does not wish to comment on it any

further.

3 According to the BIS annual report (2004) by the end of 2003, 70% of the official foreign exchange

reserves were dollar reserves and more than one third of official reserves were held by central banks of

industrial countries. These central banks can intervene for larger amounts than the central banks of

developing countries and they probably have quite different intervention practices. Central Banks of

industrialized countries are not subject to the same constraints as developing countries’ central banks:

they rely less heavily on capital controls and on unilateral currency systems (unilateral pegs, currency

boards, dollarization).

4 The period covered by our survey includes the years 2000 and 2001, whereas the survey conducted by

Neely ends in 1999, before the ECB’s first interventions.

5 This is the case of the Federal Reserve, the Bundesbank, the Bank of Japan (since 2001) and the

Reserve Bank of Australia (which has not intervened on the exchange market since 1994). The Bank of

Canada and the Swiss National Bank have made their data available but only to their own staff of

economists.

6 Such inconsistency between monetary policy and exchange rate policy could stem from a situation

where exchange rate policy is influenced by the government whereas the monetary policy is

independently conducted by the central bank.

7 As Dominguez (1999) points out, central banks have generally developed relationships with

commercial banks, in such a way that allows them to inform the market of their presence within minutes

of the intervention operations or to keep them secret.

8 Recently, Beine and Lecourt (2004) have re-examined the procedure used to isolate secret interventions

from the reported ones. They use a new identification scheme that overcomes most of the limitations that

38

result from using financial newspapers. The authors show that secret operations have recently been

favoured by the Bank of Japan.

9 See the recent comprehensive survey of Humpage (2003).

10 Hung (1997) introduces the noise-trading channel. Noise traders are traders whose demand for

currencies is affected by beliefs that are not fully consistent with economic fundamentals (Kortian 1995).

Hung suggested that, through interventions on currency reserves, central banks can influence noise traders

choices. This “additionnal” channel is related to the expectations channel as it relies on changing traders

beliefs.

11 Sterilized intervention is ineffective within the standard monetary model of exchange rate

determination.

12 This is the case in the United States where the Treasury is responsible for foreign exchange

intervention, whereas the Federal Reserve conducts the domestic monetary policy.

13 In a Ricardian world government debt is equivalent to future taxes. Similarly, assuming all foreign

reserves bear interest, the income on foreign reserves can be interpreted as a negative future tax or it can

simply be assumed that the central bank pays these interests to the private sector. In such a framework a

sterilized selling of foreign exchange is ineffective. Sterilization implies that the monetary authority buys

back government bonds from the private sector, which leaves private wealth unaffected as it also reduces

future taxes. With the monetary resources gained from the government bonds sale, the private sector is

able to buy the foreign exchange reserves sold by the central bank. But as the income from these foreign

assets already came to the private sector, the net effect on private wealth is again null.

14 This interpretation assumes that there is a cost of intervention or that the central bank is showing its

willingness to bet on its future monetary policy. For instance, according to the monetary models of the

exchange rate, an expansionary monetary policy appreciates foreign currencies relative to the domestic

currency, which makes former foreign currency purchases by the Central Bank profitable.

15 The case of Japan is quite specific: after decades of secrecy about its FX interventions, the Ministry of

Finance of Japan has drastically changed its strategy since October 2000 by making information on its

interventions carried out since April 1991 available on its website. But the Japanese authorities seemingly

do not wish to comment further on their foreign exchange interventions, as they did not answer our

questionnaire which was sent both to the Ministry of Finance of Japan, in charge of the FOREX

interventions policy, and to the Bank of Japan, which intervenes on the account of the MOF.

16 “The Riksbank’s interventions in the foreign exchange market: preparations, decision-making and

communication”, Sveriges Riksbank, 31 January 2002.

17 The European Central Bank has agreed to answer Questions 1, 3, 8, 10 and 13.

18 However, the interventions of the Federal Reserve and the Bundesbank (or the E.C.B.) have been less

frequent in the nineties than in the aftermath of the Louvre agreement (1987-1991).

19 On 17th June 1998, the U.S. monetary authorities intervened in cooperation with Japanese monetary

authorities, selling a total of $833 millions against the YEN.

20 N.Y. Federal Reserve quarterly report.

39

21 The official amounts of the concerted intervention of September 2000 and of the November 2000 ECB

unilateral interventions have not been disclosed. We only have estimations for the concerted intervention.

22 From 1989 to 2004 the average daily foreign exchange turnover has been multiplied by more than

three.

23 The Bank of Japan was, however, extremely active over the recent years 2003-2004 (period called

“post-Sakakibara”; see Ito, 2002; Gnabo and Lecourt, 2005) intervening unilaterally 128 times with an

average intervention amount reduced by half compared to the previous period 1996-2002.

24 He reported that 30 percent of the authorities surveyed change the monetary base, 30 percent

sometimes change the base and 40 percent never change the base.

25 According to Dominguez (1999), the screen news on Reuters allows one to compute that, on average,

the Fed intervenes at 14:57:10 GMT, the Bundesbank at 11:31:16 GMT and the BOJ at 3:56:36 GMT.

26 It might be an inconsistency between the monetary and exchange rate policies or the need to conceal

the choice of a misaligned exchange rate target (Vitale, 1999).

27 The ECB has been until now far less transparent on its interventions (for instance the amounts are kept

secret even after the intervention operation). This reinforces the conclusion that the ECB is not a simple

continuation of the Bundesbank.

28 Secret interventions are proxied by official interventions unreported by the Press.

29 The practice of secret interventions seems to have been far more frequent during the post-Louvre

period, mostly between 1985 and 1987. According to Table 4 approximately 50% of interventions where

conducted secretly by the Fed and the Bundesbank between January 1985 and February 1987. However in

this subperiod the proxy used for secret interventions probably overestimates the percentage of secret

intervention: for 1985-1987, the proxy used for secret interventions is the percentage of official

interventions unreported by the Financial times, Reuters news records being unavailable for this period.

30 One possible explanation to the shift in the Japanese policy compared to previous period (the

Sakakibara period characterised by transparency) lies in the disagreement between the Japanese

authorities and other central banks (especially the Fed) about the opportunity to manage the exchange rate

(Beine and Lecourt, 2004).

31 This means that central banks may aim to restore exchange rates to their fundamental values, as,

contrary to the assumption made by Vitale (1999), dealers do not always bet on the exchange rate’s

fundamental values.

32 The Norway Bank had a managed float regime from December 1992 until 29th March 2001.

33 They also declared that “the recent fluctuations have been beyond that which would have justified the

underlying economic conditions in the major countries”. Therefore, though misalignment seems to have

been the ministries of finance primary concern, volatility was also deemed excessive, as exchange rate

fluctuations appeared largely disconnected from their macroeconomic determinants.

34 This answer concerns mostly central banks in fixed or managed exchange rate regimes, in cases where

the bank acts independently and is not seeking strong signalling effects.

40

35 From 1987 to 1991, most interventions on the yen/dollar where indeed made in a coordinated manner

and the Bundesbank also increased its practice of concerted interventions on the USD/DEM. The recent

decrease in the percentage of concerted interventions of the Bundesbank/E.C.B. over the period 1996-

2001 is not significant as there were few interventions during this period (4 interventions of which 1 was

concerted).

36 Dominguez (1999) found that the effects of interventions last at least to the end of the day.

37 Many central banks added “with large amounts” to this answer.

38 The survey was conducted between October 1995 and January 1996 in the interbank foreign exchange

markets in Hong Kong, Tokyo and Singapore; 392 questionnaires were returned complete with answers

out of a total of 1,961 questionnaires sent.