To full research· The average scope of monthly intervention during the sample period was $830 million; purchases of this scope lead to depreciation of the exchange rate that is larger by 0.6 percent in that month, compared to a month without intervention.
· The research finds that the level of foreign exchange reserves (relative to GDP) and the deviation of the real effective exchange rate from its long term equilibrium level are among the factors explaining the extent of the intervention.
Research conducted by Dr. Sigal Ribon from the Bank of Israel Research Department examines the effect of the Bank of Israel’s intervention in the foreign exchange market on the exchange rate in 2009–15.
The Bank of Israel returned to intervening in the foreign exchange market in March 2008, after approximately a decade in which it did not intervene at all in the market. In the beginning, the intervention was at predetermined amounts—purchases of $25 million per day, and then $100 million per day. In August 2009, the Bank changed its policy and switched to intervening by discretion, at amounts that were not set in advance.
The current research examines whether the Bank’s intervention in the market contributed to a depreciation in the exchange rate (or a slowdown in the rate of appreciation). As the scope of the intervention and the change in the exchange rate are set at the same time, it is difficult to estimate the effect of the intervention on the change in the exchange rate. In order to allow better identification of the impact of the intervention on the exchange rate, an econometric technique was used, through which, in the first stage, the factors impacting on the scope of the intervention are estimated..
The results of the estimation indicate that in the estimation period, which refers only to the period in which the intervention was carried out at the Bank’s discretion—from September 2009 through the end of 2015—every $100 million purchased contributed, all else equal, to deprecation of 0.07–0.09 percent in the exchange rate. The average monthly scope of purchases during that period—$830 million—was found to have an impact of 0.6 percent on the exchange rate during that month.
In an alternate estimation, the estimated variable was not the extent of intervention, but a variable that is assigned the value 1 if the Bank intervened during that month and 0 if the Bank did not intervene, regardless of the quantity of the intervention. In this estimation, it was found that the Bank’s intervention, in and of itself (at any amount) in a given month led to a depreciation of approximately 1.1–1.4 percent in the exchange rate that month. This result supports the assessment that the intervention’s impact derives as well from the signaling—by the intervention itself—regarding the Bank’s overall monetary policy, and not just from the direct effect of the intervention on the asset market.
An empirical examination of the factors impacting on the intervention indicates that the Bank intervenes when it assesses that the real exchange rate is deviating (overvalued) relative to the long-term equilibrium exchange rate. The level of foreign exchange reserves relative to GDP was also found to have an impact on the intervention—the lower the level, the greater the intervention. It was found as well that growth of exports tends to reduce the intervention. In some versions of the estimation, it was found that to the extent that 1-year inflation expectations are lower, the Bank will tend to intervene more. That is, intervention in the foreign exchange market also serves as a tool to support the attaining of the inflation target.
Figure 1
Monthly Bank of Israel foreign exchange purchases and the nominal effective exchange rate, 2008–16
