William P. Osterberg

Why do central banks intervene

Abstract Intervention by central banks, in terms of buying and selling foreign currency, has been a major activity in recent years. This paper investigates the motivations for such policy and the evidence for its effectiveness. We use high quality daily data on the dollar amounts of intervention by the central banks of the US and Germany. We also use information on agreed G7 target levels for the

Central bank intervention and risk in the forward market

/DM and

Intervention from an information perspective

/Yen nominal exchange rates. Daily, nominal dollar exchange rate returns are well described as a Martingale-GARCH process, and we find little evidence that the different types of intervention have had much effect on the conditional mean of exchange rate returns. There is some evidence that intervention is associated with slight increases in the volatility of exchange rate returns. While little evidence is found for the effectiveness of intervention, the motivations are more clear. In particular, from the application of probit analysis we find that the probability of intervention is determined by the magnitude of the deviation of the nominal exchange rate from the agreed target level and, to a lesser extent, by the current volatility of exchange rates.

Deviations from daily uncovered interest rate parity and the role of intervention

Abstract A two country inter-temporal asset pricing model is developed which implies that central bank foreign exchange intervention affects the forward exchange risk premium. The model is estimated from daily foreign exchange intervention data for the US, German and Japanese central banks. Considerable empirical support is found for the theoretical model with intervention influencing the risk premium in the forward market. Purchases of dollars by the Federal Reserve Bank are found to be associated with excess

Tobin's q, investment, and the endogenous adjustment of financial structure

denominated returns. There is evidence that intervention has increased rather than reduced exchange rate volatility.

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

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 effect of subordinated debt and surety bonds on the cost of capital for banks and the value of federal deposit insurance

Abstract This paper considers the relationship between daily deviations from uncovered interest rate parity and US and German central bank intervention. The study uses daily overnight Eurocurrency deposit rates with a maturity time of 1 day, which exactly matches the sampling interval of the data. The intervention data are the official net daily purchases and sales of dollars vis-a-vis the German mark by the Federal Reserve System and the Bundesbank. The model uses FIGARCH innovations to represent the degree of long-term dependence in the volatility process. Some support is found for the intervention variables affecting the risk premium as predicted by theory. The impact of intervention in the 2 years immediately following the meltdown of the equity markets in October 1987 and Louvre Accord is particularly strong.

Underlying Determinants of Closed-Bank Resolution Costs

An analysis of a q model of investment in which financial structure affects firm value, using a perfect foresight model of general equilibrium that includes a debt-related agency cost; uses the comparative statics and dynamics of changing the corporate tax rate as an illustration.

New Results on the Rationality of Survey Measures of Exchange-Rate Expectations

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.

Optimal financial structure and bank capital requirements: an empirical investigation

Abstract This paper examines two proposals to reduce the subsidy to risk-taking embedded in the current deposit insurance system and to protect the deposit insurance fund. The two proposals are (1) requiring banks to issue subordinated debt, and (2) requiring bank stockholders to post surety bonds. We use the cash-flow version of the CAPM [Chen (1978)] to show how each proposal affects the values and rates of return on uninsured deposits and equity. We also find that only if deposit insurance is mispriced can either affect the values of the FDIC claim and the bank.