The impact of central bank FX interventions on currency components

This article assesses the impact of official FOREX interventions of the three major central banks in terms of the dynamics of the currency components of the major exchange rates over the period 1989-2003. We identify the currency components of the mean and volatility processes of exchange rates using the framework developed recently by Bos and Shephard (2006). Our results show that, in general, concerted interventions tend to affect the dynamics of both currency components of the exchange rate. In contrast, unilateral interventions are found to primarily affect the currency of the central bank present in the market. Our findings also emphasize a role for interventions conducted by these central banks on other related FOREX markets.