We test the effectiveness of the interventions performed by the Czech National Bank in the EUR/CZK within the framework of the Evans-Lyons (JME, 2002) microstructure model of the forex market. Employing time-stamped quotes and transactions on the Reuters Spot Matching market, we estimate a two-equation system on the rate change and order flow at hourly intervals. We find a significant impact of order flow on the exchange rate, equal on average to 7.6 basis points per 10 million Euro, of which 80 percent persists through the day. The existence of distinct subperiods enables us to estimate the potential effects of intervention in three different states of the market. First, the central bank might perform secret interventions in orderly market conditions, when dealers perceive a low likelihood of their occurrence. Second, secret interventions might take place in a state characterized by a high likelihood of their occurrence. The third state is characterized by the market's knowledge that intervention is indeed taking place. Our results lend support to the theoretical model and provide useful insight on the conditions for effective central bank intervention in the future.

This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating exchange rate arrangements. The FXI rule addresses a market failure: the absence of hedging solution for tail exchange rate risk in the market (i.e. high volatility). Market impairment or overshoot of exchange rate between two equilibria could generate high volatility and threaten financial stability due to unhedged exposure to exchange rate risk in the economy. The rule uses the concept of Value at Risk (VaR) to define FXI triggers. While it provides to the market a hedge against tail risk, the rule allows the exchange rate to smoothly adjust to new equilibria. In addition, the rule is budget neutral over the medium term, encourages a prudent risk management in the market, and is more resilient to speculative attacks than other rules, such as fixed-volatility rules. The empirical methodology is backtested on Banco Mexico’s FXIs data between 2008 and 2016.

This paper offers guidance on the operational aspects of official intervention in the foreign exchange market, particularly in developing countries with flexible exchange rate regimes. A brief survey of the literature and country experience is followed by an analysis of the objectives, timing, amount, degree of transparency, and choice of markets and counterparties in conducting intervention. The analysis highlights the difficulty of detecting exchange rate misalignments and disorderly markets, and argues in favor of parsimony in official intervention. Determining the timing and amount of intervention is a highly subjective excercise, and some degree of discretion is almost necessary, though policy rules may serve as "rules of thumb."

This paper examines foreign exchange intervention based on novel daily data covering 33 countries from 1995 to 2011. We find that intervention is widely used and an effective policy tool, with a success rate in excess of 80 percent under some criteria. The policy works well in terms of smoothing the path of exchange rates, and in stabilizing the exchange rate in countries with narrow band regimes. Moving the level of the exchange rate in flexible regimes requires that some conditions are met, including the use of large volumes and that intervention is made public and supported via communication.

Central banks actively engage in sterilized foreign exchange market intervention despite numerous empirical studies indicating that these operations do not systematically affect the exchange rate. Are these policies misguided and central bankers irrational? Or is evidence showing the effectiveness of sterilized intervention being overlooked? This paper argues the latter, providing evidence on the effectiveness of sterilized intervention using an event study approach linking intervention with systematic exchange rate changes. Studies using time-series techniques are limited by the nature of the data: intense and sporadic bursts of intervention activity juxtaposed against exchange rates that change almost continuously on a daily basis. The event study framework used in standard finance studies, by contrast, is better suited to this circumstance. Focusing on daily Bundesbank and US official intervention operations, we identify separate intervention quot;episodesquot; and analyze the subsequent effect on the exchange rate. Using the nonparametric sign test and matched-sample test, we find strong evidence that sterilized intervention systemically affects the exchange rate in the short-run. This result is robust to changes in event window definitions over the short-run and to controlling for central bank interest rate changes during events.