The Effectiveness of Official Foreign Exchange Intervention in a Small Open Economy: The Case of the Canadian Dollar

The Bank of Canada is one of very few central banks that has made records of the intraday timing of its intervention operations available to researchers. The authors investigate the effectiveness of sterilized intervention in the Canadian dollar exchange rate market over the period January 1995 to September 1998. They employ an event study methodology and different criteria for success, and use both daily data and high-frequency (intraday) intervention and exchange rate data. The time period covers two distinct intervention regimes, characterized by mechanistic and discretionary intervention, respectively. Furthermore, the authors address the issue of currency comovements by carrying out the analysis using both the readily observable Canadian dollar/U.S. dollar exchange rate and the Canadian dollar/U.S. dollar exchange rate adjusted for general currency co-movements against the U.S. dollar. When they analyze the high-frequency data, the authors find evidence that intervention systematically affects movements in the Canadian dollar/U.S. dollar exchange rate and in the desired direction, along with some evidence that intervention is associated with a reduction of exchange rate volatility. When investigating exchange rate movements around intervention events using daily data, the authors find some evidence supportive of effectiveness. These effects, however, are weakened when adjusting for currency comovements against the U.S. dollar.