Essays on sterilized foreign exchange intervention and monetary policy in a monetary union

Chapter 1. Sterilized foreign exchange market intervention may affect the exchange rate if it signals future monetary policy actions. Signaling will be effective if the central bank backs up intervention with predictable changes in the stance of monetary policy and, in turn, affects current expectations. We investigate whether daily intervention operations in the United States are related to changes in expectations over the stance of future monetary policy, where expectations are proxied by Federal funds futures rates. This relatively new futures market instrument has proved to be an efficient and unbiased predictor of the future spot Federal funds rate. Estimates obtained from a GARCH time-series model over the 1989–93 period using daily data do not support the signaling hypothesis: dollar-support intervention is not related to a rise in expected future short-term interest rates (monetary tightening).; Chapter 2. This paper addresses the question of whether sterilized central bank intervention systematically affects exchange rates. The methodological starting point of the paper is to recognize that standard time-series techniques may not be well suited when dealing with the analysis of intervention vis-à-vis the behavior of exchange rates as the latter are typically highly volatile on a day-to-day basis while intervention tends to come in sporadic clusters. Therefore, the paper applies the event study methodology, typically found in the finance literature, to daily data on Bundesbank and Fed post-Plaza intervention. Furthermore, the study estimates binary choice models of the conditional probabilities of observing a successful intervention operation over the sub-sample of observations when at least one of the two central banks were intervening. The results suggest that central banks can in fact improve the likelihood of success primarily through coordination and, in particular, if intervention is relatively infrequent.; Chapter 3. A monetary union—with one monetary policy for all participating member states, council members from all member states and regional differences within and/or across national borders—is a case where the often used notion of a single policymaker is less than ideal. Assuming a single policymaker fails to capture the potential importance of the council's decision making procedure (e.g. bargaining versus voting) as well as the strategic delegation aspects of each member state appointing it's council representative. Combining a multi-country, one-period delegation model with game-theoretical approaches to non-cooperative games, this paper offers new insight into the monetary policy outcome of a monetary union in general and that of the European Monetary Union in particular. The paper describes and explains the composition of the European Central Bank Council and employs the political economy analysis of the prevailing bargaining mechanism for characterizing the member states who, ceteris paribus, would stand to incur a welfare loss from the planned enlargement of the European Union.