New evidence on the effectiveness of foreign exchange market intervention (original) (raw)

New evidence on the effectiveness of exchange market intervention foreign

1995

This paper compares foreign exchange market intervention in case there is no uncertainty about the extent of an imperfectly sustainable target zone and where there is uncertainty. A well-known example of the first case was the European Monetary System between 1979 and 1992. An example of the latter is the dirty floating of the dollar against the Dmark and yen after the so-called Louvre Accord in 1987. The analysis shows that the instantaneous effectiveness of intervention tends to be larger the more implicit the band policy is. Our empirical results which use Belgian and US intervention data support this claim.

Foreign Exchange Intervention under Policy Uncertainty

IMF Working Papers, 2016

We study the use of foreign exchange (FX) intervention as an additional policy instrument in an environment with learning, where agents infer the central bank policy rules from its policy actions. Under full information, a central bank focused on stabilizing output and inflation can achieve better outcomes by using FX intervention as an additional policy tool. Under policy uncertainty, where agents perceive that monetary policy may also have exchange rate stabilization goals, the use of FX intervention entails a trade-off, reducing output volatility while increasing inflation volatility. While having an additional policy tool is always beneficial, we find that the optimal magnitude of intervention is higher in monetary policy regimes with lower uncertainty. These results indicate that the benefits of using FX intervention as an additional stabilization tool are greater in regimes where monetary policy is credibly focused on output and inflation stabilization.

Target zones for exchange rates and policy changes

Journal of International Money and Finance, 2006

We extend a target zone model to allow for occasional changes in the policy regime which change the stochastic process driving fundamentals. A scenario we have in mind is that macroeconomic policy alternates between relatively tight and loose regimes. A key implication of our analysis is that occurrences which have the appearance of speculative attacks on a currency may be associated with market perceptions of a policy regime switch having taken place. This applies both to a sudden weakening and strengthening of a currency. Our model provides an explanation, based on fundamentals, why large changes in the exchange rate might be associated with no discernible contemporaneous change in the fundamental. Therefore the model provides an explanation for this phenomenon that is an alternative to explanations based on self-fulfilling expectations. Compared with most other models of target zones, other than those relying on intra-marginal intervention, this model is better able to reproduce key features of empirical distributions of exchange rates within the band. The distribution generated by our model has more mass at the centre and less at the edges of the band than is the case for most other models.

Macroeconomic stabilization and intervention policy under an exchange rate band

Journal of International Money and Finance, 1998

Macroeconomic stabilization and foreign exchange market interventions are investigated for a small open economy with a nominal exchange rate band. In a first-best situation, a band is not advisable from a stabilization perspective, even though with money demand shocks no welfare losses are incurred. With goods demand shocks, narrowing the band affects the optimal coefficient of intramarginal monetary accommodation. With restrictions on intramarginal interventions, a band may be desirable. In particular, with supply shocks and no intramarginal interventions, a narrower band is desirable when the central bank attaches a relatively smaller weight to price, as opposed to output stability.

Intervention Strategies in Foreign Exchange Market

Economic Themes, Faculty of Economics, University of Nis, 58(3): 381-399, M51, 2020

The goal of the paper is to present the intervention strategies used by central banks in order to influence the value of the domestic currency, transparency versus discretion when it comes to publishing data about FX intervention and the cost and effectiveness of intervention. It is rarely that nowadays countries allow for an exchange rate to be formed on the market basis through the effects of supply and demand for foreign exchange on the foreign exchange market. The central bank buys or sells a foreign currency in the foreign exchange market in order to increase or decrease the value of its national currency in comparison to the foreign currency. The reasons for the intervention are the reduction of short-term oscillations of the exchange rate, the impact at the level of foreign exchange reserves, as well as the maintaining the price and financial stability as the ultimate goal of most central banks. The paper will present intervention strategies on foreign exchange market, which involves the implementation of interventions in the market of options, forward, foreign currency repo and foreign currency swaps. Then, on the spot market, interventions using an auction, as well as the application of foreign currency indexed certificates.

Macroeconomic stabilisation and intervention policy under an exchange rate band

RePEc: Research Papers in Economics, 1994

Macroewnomic stabilisation and foreign exchange market interventions are investigated within the context of a stochastic small open economy. With money demand shocks a peg is optimal, but with goods demand shocks a nominal income target is best. With supply shocks the optimal degree of monetary accommodation rises with the welfare weight attached to output rather than to price stability. A nominal exchange rate band is not advisable from a stabilisation point of view, albeit that with money demand shocks no welfare losses are incurred. With goods demand shocks, narrowing the band affects the optimal coefficient of intramarginal monetary accommodation. With supply shocks and no intramarginal interventions, it is desirable to have a wider band if there is a relatively large weight on price rather than output stability.