Central Bank Intervention

7 Key excerpts on "Central Bank Intervention"

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  Information Spillovers and Market Integration in International Finance

  Empirical Analyses

  • Suk-Joong Kim(Author)
  • 2017(Publication Date)
  • WSPC

    (Publisher)

  However, official interventions by the BOJ were ineffective at best and market disturbing at worst prior to 1995. Specifically, a Yen purchase (sale) was associated with a Yen depreciation (appreciation) on the day of intervention which might lead to an erroneous conclusion of intervention ineffectiveness. There has also been some evidence that interventions were associated with an increase in foreign exchange volatility, and consequently, had an adverse effect of destabilising the market (Beine, 2004; Nagayasu, 2004; Frenkel et al., 2005). Over recent years, the BOJ has been claimed to have intervened mostly in a secret manner. Beine and Bernal (2007) report that about 80% of total transactions during 2003–2004 were not publicly known at the time of intervention. A secret intervention is executed in such a way that allows a central bank to influence the exchange rate without sending any signal about its presence in the market. Previous literature has suggested that a central bank will opt to intervene covertly for many reasons. First, there may be occasions where there is a need to intervene to correct a current trend in exchange rate movements but such a move would contradict the current monetary policy objective. Such a misalignment in policy objectives would require a secret foreign exchange intervention so as to achieve the foreign exchange aim without losing a monetary policy credibility (Chiu, 2003). Second, if the bank experiences a low level of credibility or there is a record of past failures in influencing the currency (Dominguez and Frankel, 1993), publicly known interventions, unless they are substantially large and repeated (and possibly coordinated with other central banks) may not achieve desired outcomes as market will not value the information contained in the intervention

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  An Exchange Rate History of the United Kingdom

  1945–1992

  • Alain Naef(Author)
  • 2022(Publication Date)
  • Cambridge University Press

    (Publisher)

  12 In the event of upward pressure, the Bank ‘would let the rate go over 2.81 fairly easily; then we would begin to take in dollars on a rising market. If the demand proved to be large we would let the rate go to the upper limit’. 13 This highlights the dual strategy of the Bank. In uncertain markets, it would maintain ‘relative stability’. When the pound was falling, it would let the price reach a new equilibrium before trying to influence the direction of the exchange rate again. What emerges from these extracts is the ‘cook- book’ nature of intervention. The Bank treated fundamental economic variables as exogenous to its intervention decisions as it could not adjust fundamentals. Dealers could do no more than try to influence the Treasury or government. The Bank did not consider devaluation or changes in interest rates as options. Dealers were often forced to intervene in spite of the fundamental value of the currency. Another feature during that period was that intervention was covert and had little signalling value for the market. Current literature stresses that a central bank can lead the market with signalling, when fundamental economic factors become fuzzy after an election or a global shock for example. 14 The Bank of England did not make public its interventions. Instead, it preferred surprise and changing tactics to try to win over the market. This sometimes worked as the reserves of the Bank were sizeable in comparison to the market. This is no longer the case today. Changes in tactics are illustrated by the following intervention instruc- tions given by Bridge to the Federal Reserve: ‘I shall ask you to go into the 11 Contingency plan, the exchanges – Friday, 9th October, 8 October 1959, London, Archive of the Bank of England, C43/32. 12 Ibid. 13 Ibid. 14 Lucio Sarno and Mark P. Taylor, ‘Official Intervention in the Foreign Exchange Market: Is It Effective and, if so, How Does It Work?’, Journal of Economic Literature 39, 3 (2001), 839–68.

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  Demystifying Global Macroeconomics

  • John E. Marthinsen(Author)
  • 2020(Publication Date)
  • De Gruyter

    (Publisher)

  – Central banks create monetary base either by purchasing assets that are below the line or by lending to banks that are below the line. They pay for these assets and fund these loans by writing checks on themselves, which increases the na-tion ’ s monetary base. – Monetary controls – The primary monetary controls of central banks are the required reserve ratio, open market operations, foreign exchange market intervention, discount rate, and interest paid on bank deposits at the central bank. – Reserve requirements – Reserve requirements are imposed to control bank lending and not to ensure liquidity or solvency. – The reserve ratio is a rather blunt monetary tool because changes indiscrimi-nately affect all banks regardless of their reserve or financial positions. – Open market operations – Open market operations are central bank purchases and sales of financial se-curities (usually, government-issued securities) in open (secondary) markets. 238 Chapter 9 Central Banks – Central bank security purchases increase a nation ’ s monetary base, and sales decrease it. – To increase their independence, many central banks do not purchase securi-ties directly from the government. – When a central bank enters into a “ repurchase agreement, ” it buys securities from a dealer with a simultaneous agreement to sell them back at a higher price in the future. Central bank repos increase a nation ’ s monetary base. Reverse repos reduce the monetary base. – Foreign exchange market intervention – Foreign exchange market intervention affects a nation ’ s monetary base in the same way purchases and sales of government securities do. – Discount rate – Discount loans increase a nation ’ s monetary base. The interbank market merely redistributes the existing monetary base. – Reducing the discount rate encourages banks to borrow from the central bank, which increases the monetary base.

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  The Economics of Exchange Rates

  • Lucio Sarno, Mark P. Taylor(Authors)
  • 2003(Publication Date)
  • Cambridge University Press

    (Publisher)

  (1991), ‘Foreign Exchange Market Intervention and Domestic Monetary Control in Japan, 1973– 1989’, Japan and the World Economy , 3, pp. 147–80. 244 The economics of exchange rates Taylor, D. (1982), ‘Official Intervention in the Foreign Exchange Market, or, Bet Against the Central Bank’, Journal of Political Economy , 90, pp. 356–68. Taylor, M.P. (1995), ‘The Economics of Exchange Rates’, Journal of Economic Literature , 83, pp. 13–47. Taylor, M.P. and H.L. Allen (1992), ‘The Use of Technical Analysis in the Foreign Exchange Market’, Journal of International Money and Finance , 11, pp. 304–14. Tobin, J. (1969), ‘A General Equilibrium Approach to Monetary Theory’, Journal of Money, Credit, and Banking , 1, pp. 15–29. Tryon, R.W. (1983), Small Empirical Models of Exchange Market Intervention: A Review of the Liter-ature , Staff Studies 134, Board of Governors of the Federal Reserve System, Washington, D.C. Tullio, G. and V. Natarov (1999), ‘Daily Interventions by the Central Bank of Russia in the Treasury Bill Market’, International Journal of Finance and Economics , 4, pp. 229–42. Tullio, G. and M. Ronci (1997), ‘Central Bank Autonomy, the Exchange Rate Constraint and Inflation: The Case of Italy’, Open Economies Review , 1, pp. 31–49. Turnovsky, S.J. (1987), ‘Optimal Monetary Policy and Wage Indexation Under Alternative Distur-bances and Information Structures’, Journal of Money, Credit, and Banking , 19, pp. 157–80. von Hagen, J. (1989), ‘Monetary Targeting with Exchange Rate Constraints: The Bundesbank in the 1980s’, Federal Reserve Bank of St Louis Review , 71, pp. 53–69. Wadhwani, S. (2000), ‘The Exchange Rate and the Monetary Policy Committee: What Can We Do?’, Speech to the Senior Business Forum at the Centre for Economic Performance, 31 May. Wallich, H. (1984), ‘Institutional Cooperation in the World Economy’, in J. Frenkel and M. Mussa (eds.), The World Economic System: Performance and Prospects , Dover N.H.: Auburn House, pp.

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  Contemporary Issues in Macroeconomics

  Lessons from The Crisis and Beyond

  • Joseph E. Stiglitz, Joseph E. Stiglitz, Kenneth A. Loparo, Martin Guzman, Joseph E. Stiglitz, Martin Guzman(Authors)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The ever-present danger, in our own time just as much as in Hawtrey’s, is the prospect of rewarding bad behavior. This is a technical problem, of course, but also a political economic problem. Bankers inevitably urge the systemic importance of their own personal survival in the downturn, even while they resist purportedly misguided interference on the way up. The political economic challenge was bad enough back when the cycle was bank-based and domestic; with practice, we learned how a public-spirited central bank could, at least in principle, bring to heel the self-serving agendas of profit-seeking banks. But the problem is much more difficult in modern times when the cycle involves capital market finance at a global level. Individual national central banks, however public spirited they might be, are no match for the self-serving agendas of globe-straddling modern banks, much less their non-bank penumbra, and anyway what is public interest at the national level may be quite a different thing from public interest at the international level.

  The dream of a full-fledged global analogue to domestic political equilibrium between the money interest and the public interest seems likely to remain just that, a dream. However, partial analogues are not only possible but also seem actually to be emerging in various subglobal organizational forms for central bank cooperation, both at the top of the hierarchy (central bank swap lines) and farther down (regional cooperation such as Chiang Mai and the European Monetary System). For the purposes of this chapter, we take these emerging structures of a new international monetary system for granted, and focus instead on the re-invention or re-imagination of the role of individual central banks within that system.

  12.1   What do central banks do?

  Discussion about the role of central banking commonly distinguishes between three areas of responsibility: lender of last resort, regulation and supervision, and monetary policy for macroeconomic stabilization. It is natural, therefore, to organize the re-imagination task by asking how emergent financial globalization challenges the role of central banks in each of these three dimensions.

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  Central Banking and Financialization

  A Romanian Account of how Eastern Europe became Subprime

  • D. Gabor(Author)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Indeed, in the Treatise, the signal of the divergence between the natu- ral and the monetary rates of interest is a rise or fall in investment that would further trigger price adjustments (Leijonhufvud 1981). A mon- etary effect requires a monetary treatment; hence it is the role of the central bank to correct the market rate, by interventions at the long end of the market through an extraordinary dosage of open market pur- chases “to the point of satisfying to saturation the desire of the public to hold savings deposits” (Keynes 1930: 370). This amounted to an extreme intervention for extreme circumstances, best suited to bring long-rates down when the “bearishness of the public” was not very strong. It is important to point out that the Treatise narrative assigns the central bank an essentially enabling role in a market-driven paradigm of economic management: its discretionary liquidity policies create the necessary conditions for the private sector (businesses) to resume investment and growth. The underlying policy principle, of governing “at a distance,” would reappear in the 1980s shift to neoliberalism (Rose and Miller 1992). 2.1.3 The suspension of the Gold Standard and the General Theory Keynes’s rhetorical efforts to construct an alternative to the interest-rate policy under the constraints of the Gold Standard were neutralized by a deepening crisis in the world and British economies. The instability following the 1929 US stock-market crash increased the difficulties of maintaining the Gold Standard, which Britain abandoned in 1931, only six years after reinstating it. The Treatise’s policy proposals were trans- lated into practice: the conversion of the 1917 5 percent war loan rate, commonly understood to have been an essential factor in maintaining The Political Economy of Central Banking 29 interest rates on securities at high levels, marked the beginning of a period of cheap money policy (Sayers 1976).

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  International Liquidity and the Financial Crisis

  • William A. Allen(Author)
  • 2013(Publication Date)
  • Cambridge University Press

    (Publisher)

  The threat of deflation was a real one. In these circumstances, interest rates in many countries were reduced to historically very low levels, but interest rate management on its own was inadequate. In some countries it was supplemented by so-called unconventional monetary policy measures, including ‘credit easing’ and ‘quantitative easing’, in which central banks bought assets in order to support liquidity in financial markets and increase the ‘monetary base’. Such monetary policy measures contributed to an enormous expansion of the balance sheets of major central banks (see Figure 2.1). 16 They also caused a blurring of what had appeared to be clear demarcation lines between monetary policy and fiscal policy, and between monetary policy and public debt management. Credit easing 15 See Cecchetti and Moessner (2008). 16 See also Bank for International Settlements (2009), ch. VI, graph VI.4. Central banks’ reactions to the crisis 75 blurred the monetary/fiscal demarcation, because the pre-crisis view had conceived of monetary policy operations as involving only ‘risk- free’ assets, despite the problems of identifying government securities as risk-free assets and despite the fact that historically, and for good reasons, central bank operations had not always been confined to gov- ernment securities. Official purchases of non-government securities certainly involves some credit risk and confers some benefit on the seller; even if the credit risk and the benefit to the seller are extremely small, on a purist view they can be construed as having a fiscal policy content. Moreover, some of the assets bought by central banks carried more than a little credit risk.

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