Dollar Intervention and the Deutschemark-Dollar Exchange Rate: A Daily Time-Series Model

This paper develops a simultaneous time-series model to investigate the daily interactions between official exchange-market intervention and movements in the deutsche mark-dollar exchange rate, from November 2, 1978, to October 31, 1979. The model is constructed using both morning-opening and afternoon-closing exchange-rate quotes, Using these two quotes, and making assumptions about the timing of intervention relative to the exchange-rate quotes, enables us to measure the causal relationships among contemporaneous variables, the results suggest that, over the period investigated, the Federal Reserve responded to exchange-rate movements in a manner consistent with a leaning-against-the-wind strategy, but that this intervention tended to accentuate slightly movements in the rate. This result seems to support claims that traders recognized intervention and traded against it.