Are Foreign Exchange Intervention and Monetary Policy Related, and Does It Really Matter?

The relationship between foreign exchange intervention and monetary policy underlies the question of whether sterilized interventions can affect the exchange rate. In this article, the author examines this relationship using data on U.S. foreign exchange interventions from 1985 to 1990, recently made publicly available. She examines whether interventions could be viewed as 'signaling' changes in future monetary policy variables. The author also considers whether changes in monetary policy may induce interventions in an effort by central bankers to 'lean against the wind' of exchange rate movements. Interestingly, she finds evidence both that interventions help predict monetary policy variables and that monetary variables help predict interventions. Copyright 1995 by University of Chicago Press.