| Abstract: |
This paper tries to clarify the question of whether foreign exchange market
interventions conducted by the Bank of Japan are important for the Dollar-Yen
exchange rate in the long-run. Our strategy relies on a re-examination of the
empirical performance of a monetary exchange rate model. This is basically not
a new topic; however, we put our focus on two new questions. Firstly, does the
consideration of periods of massive interventions in the foreign exchange
market help to uncover a potential long-run relationship between the exchange
rate and its fundamentals? Secondly, do Forex interventions support the
adjustment towards a long-run equilibrium value? Our overall results suggest
that taking periods of interventions into account within a monetary model does
improve the goodness of fit of an identified long-run relationship to a
significant degree. Furthermore, Forex interventions increase the speed of
adjustment towards long-run equilibrium in some periods, particularly in
periods of coordinated Forex interventions. Our results indicate that only
coordinated interventions seem to stabilize the Dollar-Yen exchange rate in a
long-run perspective. This is a novel contribution to the literature. |