Are Foreign Exchange Intervention and Monetary Policy Related and Does It Really Matter?
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Finance
Finance and Financial Management
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The relationship between foreign exchange intervention and monetary policy underlies the question of whether sterilized interventions can affect the exchange rate. In this article, I examine this relationship using data on U.S. foreign exchange interventions from 1985 to 1990, recently made publicly available. I examine whether interventions could be viewed as "signaling" changes in future monetary policy variables. I also consider whether changes in monetary policy may induce interventions in an effort by central bankers to " lean against the wind" of exchange rate movements. Interestingly, I find evidence both that interventions help predict monetary policy variables and that monetary variables help predict interventions.