TY - JOUR
T1 - What prompts Japan to intervene in the Forex market? A new approach to a reaction function
AU - Ito, Takatoshi
AU - Yabu, Tomoyoshi
N1 - Funding Information:
This paper is drawn from chapter 3 of Tomoyoshi Yabu's Ph.D. Dissertation at Boston University ( Yabu, 2005 ). We thank Naohiko Baba, Graham Elliott, Eli Kollman, Eiji Kurozumi, Kenji Miyazaki, Pierre Perron, Akiko Tamura, and anonymous referees for many helpful comments. We have benefited from comments received from the participants of seminars at Boston University, Japanese Economic Association, MIT, and the Bank of Canada. The first author gratefully acknowledges financial support from Japan Society for the Promotion of Science, Grants-in-aid, Basic Research (A-2-15203008). Needless to say, the authors are solely responsible for any remaining errors. The views and opinions expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Japan or National Bureau of Economic Research.
PY - 2007/3
Y1 - 2007/3
N2 - This paper estimates and analyzes the reaction function of Japanese intervention in the foreign exchange (Forex) markets, using daily Japanese intervention data from April 1, 1991 to December 31, 2002. A theoretical friction model is adopted to describe the intervention as cost-minimizing behavior. An ordered probit model, consistent with the theoretical model, is employed to estimate authorities' reaction function. A noise-to-signal ratio is applied in selecting the optimal cutoff point in estimated ordered probit function. Major findings are as follows: (1) A regime change in June 1995 from small-scale frequent interventions to large-scale infrequent interventions is detected; (2) the optimum cutoff is higher in the first half than the second half.
AB - This paper estimates and analyzes the reaction function of Japanese intervention in the foreign exchange (Forex) markets, using daily Japanese intervention data from April 1, 1991 to December 31, 2002. A theoretical friction model is adopted to describe the intervention as cost-minimizing behavior. An ordered probit model, consistent with the theoretical model, is employed to estimate authorities' reaction function. A noise-to-signal ratio is applied in selecting the optimal cutoff point in estimated ordered probit function. Major findings are as follows: (1) A regime change in June 1995 from small-scale frequent interventions to large-scale infrequent interventions is detected; (2) the optimum cutoff is higher in the first half than the second half.
KW - Central bank intervention
KW - Foreign exchange rates
KW - Ordered probit
KW - Political cost
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U2 - 10.1016/j.jimonfin.2006.12.001
DO - 10.1016/j.jimonfin.2006.12.001
M3 - Article
AN - SCOPUS:33847198335
VL - 26
SP - 193
EP - 212
JO - Journal of International Money and Finance
JF - Journal of International Money and Finance
SN - 0261-5606
IS - 2
ER -