سیاست های پولی، مداخله ارز خارجی و نرخ ارز در چارچوب متحد کننده

The structural VAR model is developed to jointly analyze the effects of foreign exchange intervention and (money or interest rate setting) conventional monetary policy on the exchange rate, the two types of policy reactions to the exchange rate, and interactions between the two types of policies. First, many interactions among the two types of policies and the exchange rate are found, which suggests that a joint analysis is important. Second, foreign exchange intervention has substantial effects on the exchange rate, reacts to the exchange rate significantly (to stabilize the exchange rate), and signals future conventional monetary policy stance changes (to back up the intervention). This suggests the importance of modeling foreign exchange intervention explicitly in the study of monetary policy and exchange rate behaviors. Many other interesting results on the interactions among the two types of policies and the exchange rate are also documented.

Numerous past empirical studies addressed various questions on the relationship between monetary policy and the exchange rate. One of the trends in the literature was to examine the relationship between general monetary policy and the exchange rate. Monetary policy is typically described as the interest rate (for example, the Federal Funds rate for the U.S.) or money setting policy. Some recent studies using VAR models such as Clarida and Gali (1994), Eichenbaum and Evans (1995), Kim and Roubini (2000) examined the effects of monetary policy shocks on the exchange rate. Other, so-called monetary reaction function literature (for recent examples, Clarida et al., 1998 and Clarida et al., 2000; Kim, 2001a), addressed how the monetary authority reacts to exchange rate changes. Another trend in the literature was to analyze the relationship between another type of monetary policy and the exchange rate. This literature analyzed foreign exchange intervention. Some of them examined how the foreign exchange intervention affected the exchange rate (for example, Kaminsky and Lewis, 1996; Lewis, 1995; Dominguez and Frankel, 1993), while others examined how foreign exchange intervention reacted to the exchange rate (for example, Neumann, 1984).1 Most past studies analyzed only one type of question. Even though a few studies examined more than one question, they examined each issue based on different models and did not use a unifying framework to analyze the questions together.2 However, all these issues are related and should be analyzed together in a unifying empirical model. First, foreign exchange intervention and interest rate (or money) setting monetary policy are better when analyzed jointly since they interact with each other. For example, foreign exchange intervention may affect interest rate (or money) setting monetary policy if it is not fully sterilized. In addition, foreign exchange intervention may also signal future changes in monetary policy stance. Indeed, some past studies (for example, Lewis, 1995; Kaminsky and Lewis, 1996; Bonser-Neal et al., 1998) recognized this as a possibly important channel through which foreign exchange intervention affects the exchange rate, and examined it empirically, but failed to analyze all the issues in a unifying empirical framework. Similarly, interest rate (or money) setting monetary policy may affect foreign exchange intervention since monetary policy affects the exchange rate and foreign exchange intervention may respond to it in order to stabilize the exchange rate. Lewis (1995) and Bonser-Neal et al. (1998) empirically documented such evidence. Second, the effects of policy on the exchange rate and how policy authority reacts to the exchange rate are also better analyzed jointly. Monetary policy or foreign exchange intervention may affect the exchange rate but monetary policy or foreign exchange intervention may also react to the exchange rate changes. The two types of policy actions together generate the observed comovements of the exchange rate and instruments of policy. To examine the effects of exogenous policy actions, we should control for policy reactions. To examine policy reactions, we should control for the effects of exogenous policy actions. To jointly analyze all these issues in a unifying framework, this paper develops a structural VAR model. For that purpose, the VAR model is useful since it allows multi-shocks (such as two types of policy shocks), multi-equations (such as two policy reaction functions and the foreign exchange market conditions), and multi-variables (such as two policy instruments and the exchange rate) within one framework. The model identifies two types of policies—foreign exchange intervention and conventional monetary policy (setting money or interest rate). In addition, the model identifies both exogenous policy shocks and policy reaction functions. Based on the model, this paper examines the interactions among the two types of policies and the exchange rate in the U.S. for the post Bretton-Woods period. The basic model is built on past structural VAR models on identifying monetary policy actions, allowing non-recursive contemporaneous restrictions, such as Gordon and Leeper (1994), Sims and Zha (1995), Kim (1999) and Kim and Roubini (2000). The model with short-run restrictions is used since short-run restrictions (compared to long-run restrictions) seem to be better suited for separating the two types of policies. The non-recursive contemporaneous structure is used to allow a variety of possible contemporaneous simultaneity among the two types of policies and the exchange rate. Compared to past VAR studies identifying only money or interest rate setting monetary policy, the model in this paper also identifies foreign exchange intervention. Furthermore, compared to most past VAR studies examining the effects of policy shocks only, this paper also recovers policy reaction functions.3 The results suggest that there are a lot of interactions among the two types of policies and the exchange rate, which supports the joint analysis approach taken in this paper. With the help of the joint analysis, this study provides some new results on the interactions among them, which suggests that modeling foreign exchange policy explicitly seems to be crucial for the studies on monetary policy and exchange rate behaviors. Detailed findings are summarized in the conclusion. The results also provide a few novel insights that were never addressed in past studies. First, the relative importance between conventional monetary policy shocks and foreign exchange intervention shocks in explaining exchange rate fluctuations is addressed; surprisingly, foreign exchange policy shocks are found to be more important sources of the exchange rate fluctuations than conventional monetary policy shocks. Second, the complexity of the Fed’s behaviors in stabilizing the exchange rate is discussed; the Fed does not seem to directly use the interest rate (or money) setting monetary policy to stabilize the exchange rate, but does seem to use foreign exchange intervention, backed up by future changes in the interest rate (or money) setting monetary policy (consistent with the signaling hypothesis), although the foreign exchange intervention seems to be mostly sterilized within a month. Finally, as a caveat, even though I experiment with various alternative identifying assumptions to confirm the robustness of the results, the empirical model in this paper is better viewed as one that is based on tentative identifying restrictions. The results may require further investigation using the model with other plausible identifying restrictions as in the case of most past VAR studies on monetary policy (for example, Gordon and Leeper, 1994; Sims and Zha, 1995; Kim and Roubini, 2000). Section 2 explains the empirical model and the identifying restrictions. Section 3 discusses the empirical results. Section 4 examines the robustness of the results. Section 5 concludes with the summary of the results.

This paper develops a structural VAR model in which foreign exchange intervention and (interest rate or money setting) conventional monetary policy, and the effects of exogenous policy shocks on the exchange rate and the endogenous policy reactions to the exchange rate can be jointly analyzed within a unifying framework, in contrast to past studies analyzing each issue in a separate empirical framework. The model is applied to the post Bretton-Woods U.S. data. First, results suggest that foreign exchange intervention shocks (net purchases of foreign currencies) have significant effects on the exchange rate (appreciation). The contribution of foreign exchange intervention shocks to exchange rate fluctuations is larger than that of FFR setting monetary policy shocks. In addition, the reaction of foreign exchange intervention to the exchange rate (as leaning-against-the-wind) is found to be substantial and significant. Further, a significant signaling role of foreign exchange intervention on conventional monetary policy is found. These results together suggest that in examining the effects of monetary policy on the exchange rate and in studying exchange rate behaviors, it is important to explicitly consider foreign exchange intervention, in addition to conventional monetary policy. In past VAR studies without explicitly considering foreign exchange intervention, the role of monetary policy (both types of policies together) may have been underestimated and the role of conventional monetary policy may have been mis-measured. Second, further investigations on foreign exchange intervention suggest the following. Although foreign exchange intervention has some effects on monetary variables on impact, the impact effects are statistically insignificant and small, which may imply that the hypothesis of full sterilization within a month does not seem to be rejected. However, subsequently, foreign exchange intervention shocks (net purchases of foreign currencies) significantly decrease the Federal Funds rate and significantly increase money, which support the signaling channel of foreign exchange intervention. This signaling channel seems to be one important mechanism through which foreign exchange intervention, though sterilized, affects the exchange rate substantially. The role of other channels (such as the portfolio balance channel and coordination channel) does not seem to be clearly rejected. Third, conventional monetary policy shocks also affect the exchange rate significantly, although the effects are smaller than foreign exchange intervention shocks. In contrast to Eichenbaum and Evans (1995), only short delays in exchange rate overshooting are found. Further analysis suggests that Eichenbaum and Evans’s (1995) delayed overshooting results may be due to failure in identifying exogenous monetary policy shocks. Particularly, the Fed may react to inflationary pressure, but this may not be captured in the model, showing the price puzzle. The estimated conventional monetary policy reaction function suggests that the Fed decreases FFR with lags in reaction to foreign exchange intervention (net purchases of foreign currencies), which is also consistent with the signaling hypothesis. In addition, the estimated FFR setting monetary policy reaction function shows evidence of substantial (forward-looking) price stabilization, but not much of exchange rate stabilization. Future research in the following directions will be fruitful. It will be interesting to apply a similar model to other countries, especially those that pay more attention to exchange rate movements, in order to clarify the role of foreign exchange intervention and conventional monetary policy in explaining exchange rate movements in such countries. It would also be worthwhile to further investigate the U.S. case, using a model that employs other plausible identification schemes, since some recent studies such as Faust (1998) suggested that some results of the structural VAR models are sensitive to the chosen identification schemes.