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Title: A Market Microstructure Analysis of Foreign Exchange Intervention

Author(s): Paolo Vitale

Publication Date: January 2006

Keyword(s): exchange rate dynamics, foreign exchange microstructure, official intervention and order flow

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: We formulate a market microstructure model of exchange determination we employ to investigate the impact of foreign exchange intervention on exchange rates and on foreign exchange (FX) market conditions. With our formulation we show i) how foreign exchange intervention in°uences exchange rates via both a portfolio-balance and a signalling channel and ii) derive a series of testable implications which are coherent with a large body of empirical research. Our investigation also proposes some normative recommendations, as we show that central bank intervention can be destabilizing for the functioning of FX markets and that the route chosen for the implementation of o±cial intervention has important implications for its impact on exchange rates and on market conditions.

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Bibliographic Reference

Vitale, P. 2006. 'A Market Microstructure Analysis of Foreign Exchange Intervention'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5468