Working Papers

FOREX Intervention

Theory on FOREX intervention suggests that a sterilized purchase or sale can work either by changing the relative supply of imperfect-substitute foreign and domestic bonds, known as the portfolio balance channel, or by signalling future policy, known as the signalling channel. With novel data on secret Bank of England interventions between 1971 and 1987, I estimate a structural VAR model to study the effect of interventions. With secret interventions, we can identify what happens when there is no channel for information to be conveyed to the public. I find that interest rates fall 6 months after a foreign asset purchase in accordance with signalling theory, and no effect of this intervention in the absence of a signalling channel.