مداخله در بازار ارز در دو اقتصاد باز کوچک : تجربه کانادا و استرالیا

We examine intervention by the Bank of Canada and the Reserve Bank of Australia for daily data from 1989 to 1998. Both central banks intervene in response to excessive exchange rate volatility and uncertainty. Volatility is the implied volatility of foreign currency futures options. Uncertainty is the kurtosis of the implied risk-neutral probability density functions. We also examine the impact of inflation targets. Unlike other studies we also consider commodity futures prices. These turn out to help explain the effectiveness of intervention. Central bank intervention was largely unsuccessful in both countries though volatility and kurtosis were modestly affected.

Is foreign exchange intervention, especially in small open economies such as Canada and Australia, effective? What is its impact on market volatility and uncertainty and how might regime changes influence the results? Why Canada and Australia? Both are archetypical small open economies. Moreover, both have introduced inflation targets and have made their central banking operations more transparent. Taylor (2000) argues that a flexible exchange rate and inflation targeting are two elements in the “trinity” that defines a sound monetary policy (the third being the adoption of a monetary policy rule). Both countries’ currencies are viewed as being sensitive to similar factors such as interest rate and inflation differentials vis-à-vis the US, and investors’ expectations of domestic policies. In addition, financial markets often portray both of these currencies as being “commodity currencies”.1 Yet there are also some interesting differences between the two countries. The Bank of Canada (BoC) has targeted inflation longer than has the Reserve Bank of Australia (RBA) and, until recently perhaps, its commitment to inflation targeting was considered more formal.2 Also, the BoC has, at various times, emphasized the role of a monetary conditions index (MCI)3 while the RBA does not rely on such an indicator (Stevens, 1998). Finally, as we shall see, the record of interventions by the BoC and the RBA also reveal some interesting differences. Some studies of foreign exchange intervention examine particular events (e.g., the Quebec Referendum, the Mexican and Asian financial crises) to determine if central bank intervention is successful (Murray et al. (1997) is an exception). Here we take a time series view and ask: what is the impact of intervention in foreign exchange markets, and has the adoption of inflation targets played a role in the scale and intensity of intervention over time? More importantly, we investigate whether intervention has an impact not just on exchange rate levels and their volatility but also on the uncertainty surrounding extreme movements in the exchange rate. The rest of this paper is organized as follows. First, we briefly summarize the extant literature. Section 3 describes the model to be estimated, while Section 4 discusses the data and econometric specifications. Volatility is proxied by the implied volatility of currency futures options while uncertainty of extreme outcomes is proxied via the kurtosis of the implied risk-neutral probability density functions derived from these same implied volatilities. Finally, our specifications explicitly capture the effect that commodity prices might have on volatility, kurtosis, and intervention. This is a potentially important feature in the context of two currencies often labeled “commodity currencies,” and heretofore unaccounted for in comparable empirical work. Section 5 presents the empirical evidence. We find that the RBA was effective in reducing volatility but that its intervention increased market uncertainty. BoC interventions were not found to influence volatility or kurtosis.4 Finally, the period since inflation targets were introduced in both countries produces significantly different outcomes for both implied volatility and kurtosis in Canadian but not Australian data. Section 6 concludes and draws some policy implications from our work.

Intervention reaction function estimates confirm some of the findings of previous studies, namely that the BoC and the RBA leaned against the wind. Nevertheless, the present study adds some additional elements to the existing literature. For example, foreign exchange activities of the BoC had no effect on implied volatility or uncertainty of extreme outcomes. In contrast, RBA interventions reduced implied volatilities but had no impact on kurtosis. Consequently, intervention is not terribly effective at influencing the higher moments in the distribution of exchange rates. Commodity price movements were found to reduce implied volatility in the Canadian dollar only. In addition, changes in commodity prices increased kurtosis in the Canadian dollar, while the opposite was found in Australian data. Inflation targeting is found to have a significant impact on the results. Purchases of US dollars are slightly higher under inflation targeting, in both countries, but this may be for technical reasons. The Canadian experience with targeting is consistent with higher implied volatilities and less uncertainty about extreme outcomes, at least during the time when inflation reduction targets were in place. In contrast, there is little discernible impact from targets in the Australian case. Hence, inflation targets can potentially affect the higher moment properties of exchange rate behavior. The fact that the targeting regime is, institutionally speaking, qualitatively different in the two countries may be relevant to our findings.