Do interactions between political authorities and central banks influence FX interventions? Evidence from Japan

In the United States, Japan and the Euro Zone, FX interventions are institutionally decided by specific political authorities and implemented by central banks on their behalf. Bearing in mind that these specific political authorities and central banks might not necessarily pursue the same exchange rates objectives, the model proposed in this paper takes account explicitly of this institutional organisation to examine its effects on FX intervention activity. The empirical relevance of our theoretical model is assessed by developing a friction model on the Japanese experience between 1991 and 2004 which reveals how the magnitude of that country’s FX interventions is the outcome of the Japanese Ministry of Finance’s trade-off between attaining its own exchange rate target and one of the Bank of Japan’s.