Title

The Moses effect: can central banks really guide foreign exchange markets?

Authors

Roy Trivedi, Smita

Abstract

Central banks seek to guide the foreign exchange market through interventions. However, the success of the central bank in guiding the forex markets, much like the biblical Moses, depends on the differing perceptions and resulting bid–ask spreads of market participants following intervention. Using high-frequency data, we study the behaviour of exchange rate volatility (as reflected in change in bid–ask spreads) following intervention by Reserve Bank of India, India's central bank. We find that intervention increases the probability of volatility being in higher ranges. Event-wise analysis shows an increase in volatility in shorter time frames and a decrease in volatility over the longer time frame of the day, following intervention.

Subjects

INDIA; FOREIGN exchange market; RESERVE Bank of India; CENTRAL banking industry; FOREIGN exchange intervention (Monetary policy); SPREAD (Finance); FOREIGN exchange rates

Publication

Empirical Economics, 2020, Vol 58, Issue 6, p2837

ISSN

0377-7332

Publication type

Academic Journal

DOI

10.1007/s00181-019-01671-y