Sterilized Central Bank Intervention in the Foreign Exchange Market

In this paper we study the signalling role of sterilised central bank intervention. Through a market micro-structure framework, we show that in some circumstances sterilised intervention may represent an independent tool of policy and an instrument to influence exchange rates. Central bank intervention in the foreign exchange market also has important effects on the efficiency and liquidity of the market, the volume of trading and the conditional volatility of the exchange rate. Our results also question the general opinion that visible intervention should be preferred to secret one.

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