The Effectiveness of Official Foreign Exchange Intervention in a Small Open Economy : The Case of the Canadian Dollar

The Bank of Canada is one of very few central banks that has made records of the intraday timing of its intervention operations available to researchers. This paper investigates the effectiveness of sterilized intervention in the Canadian dollar exchange rate market over the period January 1995 to September 1998. We employ an event study methodology and different criteria for success and we use both daily data and high-frequency (intraday) intervention and exchange rate data. The time-period covers two distinct intervention regimes characterized by mechanistic and discretionary intervention, respectively. Furthermore, the paper addresses the issue of currency co-movements by carrying out the analysis using both the readily observable CAD/USD exchange rate as well as the CAD/USD exchange rate adjusted for general currency co-movements against the USD. When analyzing the high-frequency data, we find evidence that intervention systematically affects movements in the CAD/USD and in the desired direction along with some evidence that intervention is associated with a reduction of exchange rate volatility. When investigating exchange rate movements around intervention events using daily data, we find some evidence supportive of effectiveness. These effects, however, are weakened when adjusting for currency co-movements against the USD