nep-ifn New Economics Papers
on International Finance
Issue of 2020‒09‒28
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The Effectiveness of FX Interventions: A Meta-Analysis By Lucía Arango-Lozano; Lukas Menkhoff; Daniela Rodríguez-Novoa; Mauricio Villamizar-Villegas
  2. Spillovers to exchange rates from monetary and macroeconomic communications events By Enzo Rossi; Vincent Wolff
  3. Unemployment Fluctuations and Currency Returns in the United Kingdom: Evidence from Over One and a Half Century of Data By Deven Bathia; Riza Demirer; Rangan Gupta; Kevin Kotze

  1. By: Lucía Arango-Lozano; Lukas Menkhoff; Daniela Rodríguez-Novoa; Mauricio Villamizar-Villegas
    Abstract: There is ample empirical literature centering on the effectiveness of foreign exchange intervention (FXI). Given the mix of objectives and country-heterogeneity, the general lack of consensus thus far is no surprise. We shed light on this debate by conducting the first comprehensive meta-analysis in the FXI literature, with 279 reported effects that stem from 74 distinct empirical studies. We cover estimations conducted in 19 countries across five decades. Overall, our meta-survey reports an average depreciation of domestic currency of 1% and a reduction of exchange rate volatility of 0.6%, in response to a $1 billion US dollar purchase. Results are qualitatively confirmed but smaller in size under fixed and random-effect estimations. When narrowing in on different economic factors, we find that effects are magnified for cases consistent with the monetary trilemma (greater if financial openness and monetary independence are low). Effects are also larger in emerging than advanced economies, when banking crises remain mild, and when interventions are large in size and are announced.
    Keywords: Foreign exchange intervention, exchange rate, meta-analysis
    JEL: C83 E58 F31
    Date: 2020
  2. By: Enzo Rossi; Vincent Wolff
    Abstract: We study the tightness of the link between U.S. monetary and macroeconomic communication events and the exchange rate movements against the USD of four major currencies - the euro, the Swiss franc, the Brazilian real and the Mexican peso - since the global financial crisis (GFC). We find three main results. Approximately 20 percent of the U.S. communications events were associated with statistically significant exchange rate effects. Unconventional and conventional monetary policy announcements had equal impacts. The reactions of the advanced countries' currencies were more in line with each another than with those of the emerging markets' currencies.
    Keywords: Central bank communication, macroeconomic news, exchange rates, event study
    JEL: C22 E58 F31 G14
    Date: 2020
  3. By: Deven Bathia (Queen Mary University of London, School of Business and Management, Mile End Road, London, E1 4NS, United Kingdom); Riza Demirer (Department of Economics & Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Kevin Kotze (School of Economics, Faculty of Commerce, University of Cape Town, Private Bag, Rondebosch 7701, South Africa)
    Abstract: This paper provides a long-term perspective to the causal linkages between currency dynamics and macroeconomic conditions by utilising a long span data set for the United Kingdom that extends back to 1856 and a time-varying causality testing methodology that accounts for the nonlinearity and structural breaks. Using unemployment fluctuations as a proxy for macroeconomic conditions and wavelet decompositions to obtain the fundamental factor that drives excess returns for the British pound, time varying causality tests based on alternative model specifications yield significant evidence of causal linkages and information spillovers across the labour and currency markets over the majority of the sample. Causal effects seem to strengthen during the Great Depression and later following the collapse of the Bretton Woods system, highlighting the role of economic crises in the predictive linkages between the two markets. While the predictive role of currency market dynamics over unemployment fluctuations reflects the effect of exchange rate volatility on corporate investment decisions, which in turn, drives subsequent labour market dynamics (e.g. Belke & Gros (2001); Belke & Kaas (2004); Feldman (2011); among others), we argue that causality in the direction of exchange rates from unemployment possibly reflects the signals regarding monetary policy actions, which in turn, spills over to financial markets. Overall, the findings indicate significant information spillovers across the labour and currency markets in both directions with significant policy making implications.
    Keywords: Time-varying Granger Causality, GARCH, DCC-MGARCH, Unemployment, Exchange rates
    JEL: C10
    Date: 2020–09

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