Abstract

This paper studies the effectiveness and mechanism of foreign exchange interventions (FXIs) for mitigating US monetary policy spillovers. For identification, we combine deviations from a daily FXI policy rule with high-frequency US monetary policy shocks, daily exchange rates, firm-level stock prices, and firm-level balance sheet variables across multiple countries. We first present evidence that, without interventions, contractionary US monetary policy shocks spill over through a balance sheet channel: foreign exchange rates depreciate and stock prices fall, driven by those firms with US dollar debt. However, when countries counter-intervene, the spillover of a US monetary policy tightening is muted. FXIs entirely offset the depreciation of the domestic exchange rate and the reduction in stock prices for firms with US dollar debt, suggesting that “intervening against the Fed” protects economies from the adverse spillovers of US monetary policy tightening via the balance sheet channel of exchange rates.

Keywords: Foreign Exchange Interventions, Monetary Policy Spillovers, Balance Sheet Channel, Exchange Rates, Dollar Debt

JEL Classification Codes: E44, E52, F31, F32, F41