Owen F. Humpage

Government Intervention in the Foreign Exchange Market

This article offers a survey of the literature on foreign exchange intervention, including sections on the theoretical channels through which intervention might affect exchange rates and a summary of the empirical findings. The survey emphasizes that intervention is intended to provide monetary authorities with an means of influencing their exchange rates independent from monetary policy, and tends to evaluate theoretical channels and empirical results from this perspective.

Intervention from an information perspective

Abstract This paper surveys some important recent developments, which have the common theme of interpreting intervention in terms of its effects on the flow of information. The article considers the role of information in generating expectations, the formation of trading rules, price discovery, and the importance of institutional arrangements for the implementation of intervention policy. Suggestions for future research directions are discussed.

The United States as an informed foreign-exchange speculator

Abstract US exchange-market interventions have no direct effect on market fundamentals, but they may influence expectations. If intervention has value as a forecast of exchange-rate movements, knowledge that the United States is trading will cause dealers to alter their prior estimates of the distribution of exchange-rate changes. This paper finds that US intervention has had value only as a forecast that recent exchange-rate movements would moderate. Less than half of the interventions, however, seemed successful, and the favorable results were generally confined to two short periods that were characterized by uncertainty about future Federal Reserve policies.

Intervention and the foreign exchange risk premium: An empirical investigation of daily effects

Currency markets have witnessed a sharp increase in government intervention since 1985. Many observers believe that this intervention promoted the dollars depreciation between 1985 and early 1987, and that intervention has since helped to stabilize dollar exchange rates. This paper tests for a systematic effect of daily dollar intervention on exchange rate risk premia. We test for both portfolio balance effects and signaling influences by using daily data on central bank intervention (in dollars) against both the yen and the West German mark. Following work by Dominguez (1989) and Loopesko (1984), we measure the daily risk premium in terms of the deviation from uncovered interest parity. However, we follow other empirical analyses of exchange rates and allow for generalized conditional autoregressive heteroscedasticity (GARCH). Some evidence is found for both the portfolio balance and signaling channels.

Strained Relations: U.S. Foreign-Exchange Operations and Monetary Policy in the Twentieth Century

Drawing on a trove of previously confidential data, Strained Relations reveals the evolution of US policy regarding currency market intervention, and its interaction with monetary policy. The authors consider how foreign-exchange intervention was affected by changing economic and institutional circumstances - most notably the abandonment of the international gold standard - and how political and bureaucratic factors affected this aspect of public policy.

Option prices, exchange market intervention, and the higher moment expectations channel: a user's guide

A vast literature on the effects of sterilized intervention by the monetary authorities in the foreign exchange markets concludes that intervention systematically moves the spot exchange rate only if it is publicly announced, coordinated across countries, and consistent with the underlying stance of fiscal and monetary policy. Over the past 15 years, researchers have also attempted to determine if intervention has any effects on the dispersion and directionality of market views concerning the future exchange rate. These studies usually focus on the variance around the expected future exchange rate-the second moment. In this paper we demonstrate how to use over-the-counter option prices to recover the risk-neutral probability density function (PDF) for the future exchange rate. Using the yen|dollar exchange rate as an example, we calculate measures of dispersion and directionality, such as variance and skewness, from estimated PDFs to test whether intervention by the Japanese Ministry of Finance during the period 1996-2004 had any impact on the higher moments of the exchange rate. We find little or no systematic effect, consistent with the findings of the literature on the spot rate as: Japanese intervention was not publicly announced prior to August 2000, and since that time only publicly announced after the fact, over the past 10 years rarely coordinated across countries and, in hindsight, probably inconsistent with the underlying stance of monetary policy. Copyright

Do Energy-Price Shocks Affect Core-Price Measures?

This paper investigates the relationship between energy-price shocks and three core measures of inflation in a vector autoregression model that incorporates measures of monetary policy and inflation expectations. The sample set includes data at monthly frequencies from 1980 through 2000. We find that that positive energy-price shocks have significant, though small, effects on all core price measures after a lag of 12 to 18 months, but that negative shocks have no discernable impact. The results suggest that relative energy-price changes do not distort the inflation signals that standard core-price measures provide.

An Incentive-Compatible Suggestion for Seigniorage Sharing with Dollarizing Countries

Sixteen countries now treat the U.S. dollar as legal tender. Although dollarizing can help emerging-market countries gain monetary credibility and avoid currency crises, many do not want to give up the seigniorage revenues associated with issuing their own fiat currency. This article offers a proposal for seigniorage sharing.

Current Federal Reserve policy under the lens of economic history : essays to commemorate the Federal Reserve System's centennial

1. Introduction: context and content Owen Humpage 2. The uses and misuses of economic history Barry Eichengreen 3. How and why the Fed must change in its second century Allan H. Meltzer 4. The lender of last resort: lessons from the Feds first 100 years Mark A. Carlson and David C. Wheelock 5. Close but not a central bank: the New York Clearing House and issues of Clearing House loan certificates Jon Moen and Ellis Tallman 6. Central-bank independence: can it survive a crisis? Forrest Capie and Geoffrey Wood 7. Politics on the road to the US monetary union Peter L. Rousseau 8. US precedents for Europe Harold James 9. The limits of bimetallism Christopher M. Meissner 10. The reserve pyramid and interbank contagion during the Great Depression Kris Mitchener and Gary Richardson 11. Would large-scale asset purchases have helped the 1930s? An investigation of the responsiveness of bond yields from the 1930s to changes in debt levels John Landon-Lane 12. A tale of two countries and two booms - Canada and the United States in the 1920s and the 2000s: the roles of monetary and financial stability policies Ehsan U. Choudhri and Lawrence L. Schembri 13. It is history, but its no accident: differences in residential mortgage markets in Canada and the United States Angela Redish 14. Monetary regimes and policy on a global scale: the oeuvre of Michael D. Bordo Hugh Rockoff and Eugene N. White 15. Reflections on the history and future of central banking Michael D. Bordo.

Walking the Fence: A Sensitivity Analysis of Brazil's Public Debt

Brazil is walking on a fence between sustainable and unsustainable public-debt dynamics. How it treads could affect not only its own economic prosperity but that of its neighbors, emerging markets in general, and U.S. financial institutions in particular. Relatively small improvements in Brazilian economic conditions and a continuation of that countrys recent fiscal improvements could push Brazil in the right direction, particularly if the dollar continues to depreciate.