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New study by Prof. Dr. Markus Hertrich published in the Journal of Money, Credit and Banking.
Sterilized foreign exchange market interventions in the spot market – i.e., purchases or sales of foreign currency where the impact on central bank reserves and thus on the short-term interest rate is offset by counterbalancing open market operations of equal magnitude –can have significant effects even in an environment of very low interest rates. This is demonstrated by a new empirical study by Dr. Markus Hertrich, Professor of International Economics at htw saar, which was published in early February in the internationally renowned Journal of Money, Credit and Banking. The journal is one of the leading scientific publications in the field of money, credit, and banking and is frequently cited as a reference in research and policy advice.
In the study, Prof. Dr. Markus Hertrich, together with Dr. Daniel Nathan, Assistant Professor of Finance at the Hong Kong Polytechnic University, examines the impact of US dollar purchases by the Bank of Israel between 2013 and 2019, using daily available, confidential foreign exchange intervention data and public options data. The findings reveal that a purchase of USD 1 billion by the central bank led, on average, to a depreciation of the Israeli Shekel by around 0.8 percent. This effect is unusually strong by international standards and indicates a high effectiveness of such monetary policy measures.
The analysis also shows that the effectiveness of interventions is closely linked to structures in international financial markets. In particular, the limited risk-bearing capacity of global banks can amplify the effect, as market participants are then only partially able to trade against the interventions. In addition, the interventions not only influence the spot market but also forward and options markets – for example, by altering expectations about future exchange rates and associated risks. This provides an explanation for the deviations from covered interest parity observed since the 2008/09 financial crisis, which, in a world where financial market participants act to maximize profits, should not arise over longer periods.
“Our results demonstrate that sterilized spot market interventions represent an effective monetary policy instrument for small, open economies when policy rates cannot be lowered further,” says Hertrich.
The study thus provides empirically robust findings for the current academic and political debate on unconventional monetary policy instruments.
To the publication:
https://onlinelibrary.wiley.com/doi/10.1111/jmcb.70037
markus.hertrich@htwsaar.de
https://onlinelibrary.wiley.com/doi/10.1111/jmcb.70037
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