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Working Paper

New Results on the Impact of Central-Bank Intervention on Deviations from Uncovered Interest Parity

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Germany, Japan, and the United States continue to view foreign exchange intervention as an effective instrument, although the mechanism through which it operates is unclear. In this paper, we use official data on daily dollar intervention to examine its impact on exchange-rate risk premia through both the portfolio-balance and expectations channels. We define the risk premium in terms of deviation from uncovered interest parity and model its behavior using generalized autoregressive conditional heteroscedasticity. Our evidence of portfolio-balance and expectations effects is inconsistent across subperiods of different exchange-rate-policy regimes. Also, unlike Dominguez (1990) and Loopesko (1984), we find no evidence that coordination ofintervention improves its efficacy.
04.01.1992ISSN 2573-7953 WP 92-07DOI 10.26509/frbc-wp-199207

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Humpage, Owen F., and William P. Osterberg. 1992. “New Results on the Impact of Central-Bank Intervention on Deviations from Uncovered Interest Parity.” Federal Reserve Bank of Cleveland, Working Paper No. 92-07. https://doi.org/10.26509/frbc-wp-199207