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THE EFFECTIVENESS OF CENTRAL BANK INTERVENTION: EVIDENCE FROM TAIWAN’S FOREIGN EXCHANGE MARKET

This paper explores the effectiveness in which the Central Bank of the Republic of China (Taiwan) artificially devalues the New Taiwan Dollar relative to the US Dollar via the major foreign exchange brokered firm in Taiwan. The empirical results support that Taiwan’s central bank targets to step into the major market to influence the exchange rate at some specific intervals. However, the effectiveness of intervention in the major brokered company is short run and might reverse overnight. Moreover, intervention increases the returns and spreads of the two markets for a few minutes. Finally, the effectiveness of moral suasion is insignificant, depending on the timing of interventions and the response of market participants to those interventions.