Talks, Financial Operations or Both? Generalizing Central Banks' FX Reaction Functions

Abstract

This paper generalizes central banks' FX interventions reaction functions to include oral interventions alongside actual ones. Using Japanese data for the 1991-2004 period, we estimate an ordered probit model that allows understanding when each type of intervention occurs. The procedure is useful to understand the extent to which oral and actual interventions are substitutes or complements. Our results indicate that authorities tend to adopt progressively stronger measures as the exchange rate behaves in an increasingly unfavorable way meaning that words and acts are used as complements only in extreme cases.

Keywords: Central banks, Foreign exchange market, Interventions

JEL Classification: E58, F31, G15