The Immediate Impact and Persistent Effect of FX Purchases on the Exchange Rate
In recent years, Forex (FX) interventions have been routinely used by the Bank of Israel as well as by other central banks as an additional monetary instrument, with the objective of moderating appreciation trends of the domestic currency. This paper analyzes the immediate effect of the Bank of Israel’s FX interventions on the exchange rate and the persistence of this effect over time. To identify this effect, we first measure the intraday impact of FX intervention using a novel high-frequency, minute-by-minute dataset of interventions between 2009 and 2017. Next, we use our intraday measure to estimate the persistence of FX intervention shocks over longer horizons (in trading days), where we base our empirical approach on the potential outcome framework and the Local Projections method. We find that FX intervention shocks – that is, unexpected FX purchases – cause, on impact USDILS exchange rate depreciation in over 90 percent of the cases. We also find that this effect has a persistent impact on the nominal effective exchange rate for about 40–60 trading days, which are equivalent to between 2 and 3 calendar months. Based on this finding we infer that between 2013 and 2017 interventions caused the level of the exchange rate to depreciate by about 2–3 percent on average, where the effect of each intervention varied with its intensity. We stress that these results reflect the contribution of unexpected FX purchases given the fact that the discretionary intervention regime was in place throughout the investigated period, and not the effect of the presence of the regime itself.