A New Method for Identifying the Effects of Foreign Exchange Interventions


  • We would like to thank Rasmus Fatum, Simon Gilchrist, Hidehiko Ichimura, Yuko Imura, Takatoshi Ito, Daisuke Nagakura, Jouchi Nakajima, Masao Ogaki, Paolo Pesenti, Toshiaki Watanabe, Hung Yin-Ting, and seminar participants at the Bank of Japan, Boston University, and NBER Japan Project Meeting for their helpful comments and suggestions. This research forms part of the project on “Understanding Inflation Dynamics of the Japanese Economy” funded by a JSPS Grant-in-Aid for Creative Scientific Research (18GS0101).


Central banks react even to intraday changes in the exchange rate; however, in most cases, intervention data are available only at a daily frequency. This temporal aggregation makes it difficult to identify the effects of interventions on the exchange rate. We apply the Bayesian Markov-chain Monte Carlo (MCMC) approach to this endogeneity problem. We use “data augmentation” to obtain intraday intervention amounts and estimate the efficacy of interventions using the augmented data. Applying this new method to Japanese data, we find that an intervention of 1 trillion yen moves the yen/dollar rate by 1.8%, which is more than twice as much as the magnitude reported in previous studies applying ordinary least squares to daily observations. This shows the quantitative importance of the endogeneity problem due to temporal aggregation.