The paper develops a three-asset-portfolio model to analyse consequences of foreign exchange market operations by Asian central banks on the exchange rates between euro, dollar and yen. Both an analytical as well as a graphical solution is presented. It is found that -- contrary to public belief...

In the current policy debate, it is often argued that foreign exchange interventions by Asian central banks lead to an excessive appreciation of the euro against the dollar. This paper shows that in a three asset portfolio model the opposite holds: Interventions by Japan's central bank...

By combining expansionary open market operations with sales of foreign exchange, the central bank can expand the monetary base without depreciating the exchange rate. Thus, if there is a monetary political business cycle, sales of foreign exchange are especially likely before elections. Our...