2.1.3 Analysis Model Of The Central Bank
2. Indirect Intervention
The central banks can affect the exchange rate indirectly by influencing the factors that determine the exchange rate. Variables that affects the exchange rates are interest rates, inflation, income level, governments control and expectations of future exchange rates.
When using indirect intervention, commonly central bank focus on government controls or interest rates. The interest rate is the cost paid for borrowing funds. The central bank has an authority to set interest rate which used to calculate bond yields, asset returns, and interbank market. On a more general level, interest rates have an impact on the overall health of the economy because they affect not only consumers’ willingness to spend or save but also …show more content…
lowered its interest rates more than it would have without the crisis. Although there was some concern that the lower rates would lead to higher U.S. inflation, a greater concern was that if rates were not lowered, the United States would experience a weak economy, which would be transmitted to other countries. The U.S. interest rates provided some stimulus to the U.S. economy, offsetting the reduction in U.S. economic growth due to lower demand for foreign exports. Thus, the Fed’s monetary policy was not only influenced by international conditions but also had an influence on those conditions (Madura, …show more content…
Ideally, the central bank intervention data is provided by the central banks. However, the data are rarely available. Only most advanced economies publish actual intervention data.
Tsen (2014) indicates that “the changes in the central bank’s holdings of International reserves can be a good proxy for intervention activity in the absence of official central bank intervention data” (p. 3). The proxy of central bank intervention such as the changes in central bank’s holdings on international reserves is tested. Adler et., al (2015), and Patro et., al (2015) investigated foreign exchange intervention (FXI) by using reserves as the proxy for foreign exchange intervention.
In this study, we use intervention index as the proxy of central bank intervention. We follow the approach of the previous study from Erler et., al (2015) which calculates intervention index from the changes of interest rate and reserves. This study states an intervention is significant if the intervention index exceeds the average value of the previous 12 months intervention index plus three times of standard
The central banks can affect the exchange rate indirectly by influencing the factors that determine the exchange rate. Variables that affects the exchange rates are interest rates, inflation, income level, governments control and expectations of future exchange rates.
When using indirect intervention, commonly central bank focus on government controls or interest rates. The interest rate is the cost paid for borrowing funds. The central bank has an authority to set interest rate which used to calculate bond yields, asset returns, and interbank market. On a more general level, interest rates have an impact on the overall health of the economy because they affect not only consumers’ willingness to spend or save but also …show more content…
lowered its interest rates more than it would have without the crisis. Although there was some concern that the lower rates would lead to higher U.S. inflation, a greater concern was that if rates were not lowered, the United States would experience a weak economy, which would be transmitted to other countries. The U.S. interest rates provided some stimulus to the U.S. economy, offsetting the reduction in U.S. economic growth due to lower demand for foreign exports. Thus, the Fed’s monetary policy was not only influenced by international conditions but also had an influence on those conditions (Madura, …show more content…
Ideally, the central bank intervention data is provided by the central banks. However, the data are rarely available. Only most advanced economies publish actual intervention data.
Tsen (2014) indicates that “the changes in the central bank’s holdings of International reserves can be a good proxy for intervention activity in the absence of official central bank intervention data” (p. 3). The proxy of central bank intervention such as the changes in central bank’s holdings on international reserves is tested. Adler et., al (2015), and Patro et., al (2015) investigated foreign exchange intervention (FXI) by using reserves as the proxy for foreign exchange intervention.
In this study, we use intervention index as the proxy of central bank intervention. We follow the approach of the previous study from Erler et., al (2015) which calculates intervention index from the changes of interest rate and reserves. This study states an intervention is significant if the intervention index exceeds the average value of the previous 12 months intervention index plus three times of standard