Interventions and Exchange Rates : An Analysis with High Frequency Data

We use high frequency data for the mark/dollar exchange rate for the period 1992-1995 to evaluate the effects of interventions. We estimate an unobserved components model that decomposes volatility into non-stationary and stationary parts. Stationary components in turn are decomposed into seasonal and non-seasonal intra-day parts. Our results confirm the view that interventions are not particularly effective. The exchange rate moves in the desired direction only about 50% of the time, and often with a substantial increase in volatility. The model suggests that the two components which are affected the most by interventions are the permanent and the stochastic intra-day