On the effectiveness of sterilized foreign exchange intervention

This paper addresses the question of whether sterilized central bank intervention systematically affects exchange rates. Furthermore, the paper analyzes whether a central bank can conduct its intervention operations in a specific manner, in order to increase the likelihood of achieving its objectives. The first question is addressed by applying the event study methodology of the finance literature to daily data on Bundesbank and Fed post-Plaza intervention. Using the non-parametric sign test and the matched sample test, evidence of effectiveness in terms of a systematic association between exchange rate levels and intervention is found. The second question is addressed by estimating binary choice models of the conditional probabilities of observing a successful intervention operation over observations when at least one of the two central banks were intervening. The results suggest that central banks can in fact improve the likelihood of success primarily through co-ordination and, also, if intervention occurs infrequently.