ZEW Economic Studies. Publication Series of the Centre for European Economic Research (ZEW), Mannheim, Germany

Transcription

1 ZEW Economic Studies Publication Series of the Centre for European Economic Research (ZEW), Mannheim, Germany

2 ZEW Economic Studies Further volumes of this series can be found at our homepage: springeronline.com Vol. 6: B. Fitzenberger Wages and Employment AcrossSkill Groups An Analysis for West Germany XII, 251 pp. ISBN Vol. 7: K. Rennings et al. (Eds.) Social Costs and Sustainable Mobility Strategi es and Experiences in Europe and the United States VI, 212 pp. ISBN Vol. 8: H. Legler et al. Germany's Technological Performance X, 191 pp. ISBN Vol. 9: O. Burgel The Internationalization of British Start-up Companies in High-Technology Industries XIV, 230 pp. ISBN Vol. 10: J. Hemmelskamp et al. (Eds.) Innovation-Oriented Environmental Regulation Theoretical Approaches and Empirical Analysis VI, 348 pp. ISBN Vol, 11: K.L. Brockmann, M. Stronzik (Eds.) Flexible Mechanisms for an Efficient Climate Policy Cost Saving Policies and Busines s Opportunities VIII, 130 pp. ISBN Vol. 12: W. Smolny Endogenous Innovations and Knowledge Spillovers A Theoretical and Empirical Analysis VIII, 277 pp. ISBN Vol. 13: M. Lechner, F. Pfeiffer (Eds.) Econometric Evaluation of Labour Market Policies X, 242 pp. ISBN Vol. 14: M. Beise Lead Markets Country -Specific Success Factors of the Global Diffusion of Innovations XVI, 305 pp. ISBN X Vol. 15: O. H. Jacobs, C. Spengel Effective Tax Burden In Europe Current Situation, Past Developments and Simulations of Reforms X, 131 pp. ISBN Vol. 16: U. Kaiser Innovation, Employment, and Firm Performance in the German Service Sector X, 164 pp. ISBN Vol. 17: J. Koke Corporate Governance In Germany An Empirical Investigation VIII, 184 pp. ISBN X Vol. 18: E. Wolf What Hampers Part-Time Work? An Empirical Analysis of Wages. Hours Restrictions and Employment from a Dutch-German Perspective X, 174 pp. ISBN Vol. 19: P. Cecchini et al. (Eds.) The Incomplete European Market for Financial Services XII, 255 pp. ISBN Vol. 20: C. Bohringer, A. Loschel (Eds.) Empirical Modeling of the Economy and the Environment VI, 326 pp. ISBN Vol. 21: K. Rennings, T. Zwick (Eds.) Employment Impacts of Cleaner Production VIII, 322 pp. ISBN Vol. 22: O. Burgel, A. Fier, G. Licht, G. Murray The Internationalisation of Young High-Tech Firms An Empirical Analysis in Germany and the United Kingdom XII, 291 pp. ISBN

3 Felix Hiifner Foreign Exchange Intervention as a Monetary Policy Instrument Evidence for Inflation Targeting Countries With 32 Figures and 23 Tables ZEW Zentrum for Europăische Springer -Verlag Berlin Heidel berg GmbH Wirtschaftsforschung GmbH Centre for European Economic Research

4 Series Editor Prof. Dr. Wolfgang Franz Author Dr. Felix Hiifner Centre for European Economic Research (ZEW) L7, Mannheim Germany ISBN ISBN (ebook) DOI / Cataloging-in-Publication Data applied for A catalog record for this book is available from the Library of Congress. Bibliographic information published by Die Deutsche Bibliothek Die Deutsche Bibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data is available in the Internet at < This work is subject to copyright. AII rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Physica-Verlag. Violations are liable for prosecution under the German Copyright Law. springeronline.com Springer-VerlagBerlinHeidelberg 2004 Originally published by Physica-Verlag Heidelberg in 2004 The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: Erich Dichiser, ZEW, Mannheim SPIN / O - Printed on acid-free paper

5 Preface This book was written while I was a PhD student at University ofwiirzburg and a research fellow at the Zentrum fur Europaische Wirtschaftsforschung (ZEW) (Centre for European Economic Research) in Mannheim. It was accepted as a doctoral dissertation in March 2003 under the title "Sterilized Foreign Exchange Intervention as a Monetary Policy Instrument in Inflation Targeting Countries Evidence for Australia, Canada, New Zealand, Sweden and the United Kingdom ", I owe a particular debt of gratitude to my supervisor, Professor Peter Bofinger, for his steady support and many helpful discussions. I would also like to thank my second advisor, Professor Martin Kukuk. Furthermore, I would like to thank the ZEW and in particular Professor Wolfgang Franz for supporting this dissertation. During the preparation of this book I benefited from fruitful discussions with my colleagues, Friedrich Heinemann, Volker Kleff, Jens Koke, Matthias Meitner, Michael Schroder and Martin Schuler from the ZEW financial markets department. Furthermore, I received many helpful comments from participants of the doctoral seminars in Wiirzburg. In particular, I would like to thank Timo Wollmershauser from University of Wiirzburg for several comments and suggestions. Finally, I would like to thank my parents, my brother Max as well as Sandra for their support and encouragement over the past years. Mannheim, June 2003 Felix Hiifner

6 Table of Contents 1 Introduction Background Approach to the Problem and Research Strategy Structure of the Analysis 6 2 The Conventional View on Inflation Targeting Definition and Elements oflnflation Targeting Lack of an Explicit Intermediate Target Price Stability as the Final Target Publication of a Numerical Target Transparent Communication of Central Bank Decisions Increased Accountability of the Central Bank Summary and Assessment Adoption oflnflation Targeting Overview Country Selection A Basic Model for (Closed-Economy) Inflation Targeting Open Economy Inflation Targeting Exchange Rate Pass-Through and Monetary Policy The Svensson Model The Ball Model Two Critical Assumptions 30 3 Uncovered Interest Parity in Practice The Rationale ofinterest Parity Covered Interest Parity Uncovered Interest Parity An Empirical Test for Inflation Targeting Countries Consequences of the Failure ofuip 42 4 Sterilised Interventions as an Additional Policy Instrument Explaining and Interpreting Sterilised Interventions Channels for Influencing Exchange Rates Sterilised Interventions as a Monetary Policy Instrument Sterilisation Evidence for Inflation Targeting Countries Managed Floating in Theory 54

7 VIII Table of Contents Limitations ofsterilised Interventions The Effectiveness ofsterilised Interventions: A Review ofthe Literature The Intervention Debate The Inefficiency ofsterilised Interventions in Monetary Models 61 The Portfolio Balance Channel ofinterventions 62 Interventions as a Signal of Future Monetary Policy 64 Noise-Traders and the Role ofsterilised Interventions 68 The Microstructure Approach and Sterilised Interventions 71 Assessment ofintervention Models 76 5 Sterilised Foreign Exchange Intervention in Practice Foreign Exchange Reserves as an Intervention Proxy Reasons for Holding Foreign Exchange Reserves Mechanics offoreign Exchange Intervention External Influences on Foreign Exchange Reserves and Their Adjustment Identification and Correction of Valuation Effects Estimation ofinterest Earnings The Correlation between Official Interventions and Reserves Active versus Passive Interventions Intervention Activity in Inflation Targeting Countries Comparison ofintervention Capacities Comparison ofreserve Changes Correction for Valuation Changes Correction for Interest Earnings Identification ofintervention Activity Absolute Reserve Changes Normalisation with the Degree ofopenness Normalisation with the Size offoreign Exchange Markets Response to Shocks Ranking ofintervention Activity The Use ofinterventions as an Additional Policy Instrument Interventions and the Variation ofinterest Rates Interest Rate Volatility Compared Frequency ofpolicy Rate Changes Compared Interpretation ofthe Findings Policy Reaction Functions and Exchange Rates Evolution oftaylor Rules Description ofdata and Methods Stationarity Tests Country-Specific Results and Interpretation Short Case Studies ofthe Country Experiences New Zealand Canada 127

8 Table of Contents IX Australia United Kingdom Sweden Performance of Inflation Targeting: An Evaluation Conclusion and Outlook Appendix List of Figures 163 List of Tables Bibliography