Announcements, financial operations or both? Generalizing central banks' FX reaction functions

This paper generalizes the reaction functions of central banks' FX interventions to include oral interventions alongside actual ones. Using Japanese data for the 1991-2004 period, we estimate an ordered-probit model explaining the occurrence of each type of intervention and evaluating the extent to which oral and actual interventions are substitutes or complements. In addition, the effectiveness of interventions is examined using an event-study approach. Our results indicate that the Japanese authorities tended to adopt progressively stronger measures as the exchange rate was found to behave in an increasingly unfavorable way. This suggests that words and deeds were only coordinated (i.e. used in a complementary way) in extreme cases. Overall, interventions are found to be moderately successful in correcting unwanted exchange-rate developments, especially volatility.