An Investigation of FX Intervention in Response to Financial and Real Shocks

This paper reports an attempt to characterize the empirical FX intervention rule using a panel quarterly data set of 25 countries. The focus is on the types of shocks central banks tend to react to: financial and/or real. The theoretical framework on which the empirical analysis is based combines three elements: A link between the real exchange rate and the current account, imperfect substitution between domestic and foreign assets, and a policy of moderating the effects of shocks on the real exchange rate. This framework allows to separate the observations into different samples, each one dominated by one type of shock. The effects of a particular shock on FXI policy is carried out using the corresponding sample.

Joint with Avihai Lifschitz