Should central bankers talk to the foreign exchange markets?

In this paper we study the role of official statements and speeches given by central bank authorities in charge of foreign exchange policy. We investigate the impact of statements that comment on and confirm such interventions on the day of the intervention on the two major foreign exchange markets over an extended period (1989–2003). We also study the impact in terms of policy effectiveness of central bank communication before the actual operations. Our results suggest that appropriate speeches clarifying the current intervention policy can have marginally virtuous effects, both in terms of exchange rate level and exchange rate volatility. This leads us to conclude that, in general, actual interventions on the market should still be employed, provided that official statements are used to clarify the nature and purpose of these interventions.