Beware of Announcement Effects When Assessing Policy Interventions

The effects of exchange market interventions are frequently estimated by looking at what happened on the day of the announcement of the intervention or of the intervention itself. But my observation—based in part on experience running the international division of the U.S. Treasury and engaging in financial diplomacy with Japan and other countries—is that announcement effects can be very misleading as an estimate of the overall effect of interventions because the impacts can wear off with no announcement or reverse interventions. The recent experience with the September 14 announcement of an exchange market intervention by the Bank of Japan is an important case in point as clearly indicated by this chart of the yen-dollar exchange rate. The yen did noticeably depreciate against the dollar on the day that the intervention was announced and took place, but that has already been reversed.

This is one of the reasons why I think it is unwise to rely on announcement effects to assess the impact of central bank asset purchase programs as in Gagnon et al. Better to look over longer periods of time where you can control for other factors as in this paper with Johannes Stroebel.

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