To full research​​


·       The research examines the effect
on the exchange rate of the Bank of Israel’s intervention in the foreign
exchange market. It found that in the period examined, from September 2009
through the end of 2015, the intervention contributed to a more rapid
depreciation (or a slower appreciation) of the effective exchange rate of the
shekel.

·     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

Why the Bank of Israel Intervenes in the Foreign Exchange Market, and What Happens to the Exchange Rate