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Effects of Central Bank Intervention in the Foreign Exchange Market (Effets de l'intervention de la banque centrale dans les marchés des changes) (Efectos de la intervención de los bancos centrales en los mercados de divisas)

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Author Info

  • Hans Genberg

    (International Monetary Fund)

Abstract

The article surveys theoretical issues and empirical evidence on the effects of central bank intervention in foreign exchange markets on exchange rate movements. The focus is on the ability of fully sterilized intervention to influence exchange rates in a predictable manner. Theoretical considerations suggest that the exchange rate may be affected by intervention if assets denominated in different currencies are imperfect substitutes, thus creating opportunities for intervention (undertaken for portfolio balance reasons) to modify interest differentials and, hence, the exchange rate. Alternatively, intervention may have a systematic influence on expectations of future monetary policy and, therefore (as a result of speculation), on the current exchange rate. The empirical evidence on either of these factors is flawed because of inherent difficulties in measuring expectations, on the one hand, and in obtaining good data on the currency composition of intervention and asset stocks, on the other. Evidence drawn from estimates of exchange rate equations does not, in general, confirm the existence of significant and stable portfolio balance effects. The same conclusion emerges when one looks at the effects of intervention on risk premiums in the foreign exchange markets, on differences between offshore and domestic interest rates, and on covered international interest differentials. The lack of any firm evidence that portfolio balance effects resulting from intervention in foreign exchange markets affect exchange rates predictably suggests that intervention policy cannot be distinguished from general monetary policy for practical purposes. This, in turn, implies that attempts to use these two policy instruments independently may lead to lesser, rather than to greater, exchange rate stability. /// Cet article examine les questions théoriques et les preuves empiriques relatives aux effets qu'exerce sur les mouvements du taux de change l'intervention de la banque centrale dans les marchés des changes. Il fait le point sur le pouvoir d'une intervention totalement stérilisée d'influencer sur les taux de change de manière prévisible. Des considérations théoriques donnet à penser que le taux de change peut être influencé par l'intervention si les actifs libellés en diverses monnaies sont des substituts imparfaits, créant ainsi les occasions d'intervention visant à modifier les différentiels d'intérêt et, par conséquent, le taux de change par suite du "rééquilibrage" du portefeuille par le secteur privé. Autrement, l'intervention peut exercer une influence systématique sur les anticipations de politique monétaire future et, donc, (par suite de la spéculation) sur le taux de change courant. La preuve empirique dégagée de l'un ou l'autre de ces facteurs est boiteuse en raison des difficultés inhérentes, d'une part, à la mesure des anticipations et, d'autre part, à l'obtention de données péremptoires sur la composition monétaire de l'intervention et les stocks d'actifs. En général, la preuve à partir des estimations d'équations de taux de change ne confirme pas l'existence d'effets significatifs et durables sur l'équilibre du portefeuille. On arrive à la même conclusion quand on observe les effets de l'intervention sur les primes de risque dans les marchés des changes, sur les différences entre taux d'intérêt offshore et taux d'intérêt intérieurs, et sur les différentiels d'intérêt internationaux couverts. L'absence de toute indication solide que les effets d'équilibre du portefeuille par suite de l'intervention dans les marchés des changes ont une incidence prévisible sur les taux de change mène à penser que la politique d'intervention ne saurait être distincte de la politique monétaire générale aux fins d'application. Il s'ensuit, par ricochet, que les tentatives d'utilisation indépendante de ces deux instruments peuvent se solder par une diminution plutôt qu'une augmentation de la stabilité du taux de change. /// En este artículo se examinan algunas consideraciones teóricas y demostraciones empíricas referentes a los efectos que la intervención de los bancos centrales en los mercados de divisas produce en las fluctuaciones de los tipos de cambio. El aspecto principal consiste en determinar hasta qué punto se puede prever la influencia que ejercerá en el tipo de cambio una intervención cuyo impacto en la oferta monetaria interna haya sido totalmente neutralizado. Las consideraciones teóricas parecen indicar que la intervención puede influir en el tipo de cambio si los activos denominados en distintas monedas no son del todo intercambiables, con lo cual se crean oportunidades de intervención para modificar las diferencias de tipo de interés y, por consiguiente, el tipo de cambio, pues el sector privado modifica la composición de la cartera para reequilibrarla. Por otra parte, la intervención puede ejercer una influencia sistemática en las expectativas del público en cuanto al curso que seguirá la política monetaria y, por consiguiente (como resultado de la especulación), en el tipo de cambio en vigor. Los resultados empíricos sobre la base de uno u otro de estos factores adolecen de deficiencias debido, por una parte, a la dificultad inherente a la medición de las expectativas y, por otra, a la obtención de datos exactos sobre monedas utilizadas en la intervención y tenencias de activos. Los resultados basados en la estimación de ecuaciones del tipo de cambio no confirman, en general, que se produzcan efectos significativos y estables en lo que respecta al equilibrio de la cartera. Se llega a la misma conclusión al observar los efectos de la intervención sobre las primas de riesgo en los mercados de divisas, sobre las diferencias entre los tipos de interés externos y los internos y sobre las diferencias cubiertas de los tipos de interés internacionales. La falta de pruebas concluyentes de que los efectos de la intervención en los mercados de divisas sobre el equilibrio de la cartera influyen de manera previsible en los tipos de cambio parece indicar que desde el punto de vista práctico no cabe separar la política de intervención de la política monetaria general. Esto significa que si ambos instrumentos de política se utilizan independientemente puede que la estabilidad de los tipos de cambio disminuya en vez de aumentar.

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Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 28 (1981)
Issue (Month): 3 (September)
Pages: 451-476

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Handle: RePEc:pal:imfstp:v:28:y:1981:i:3:p:451-476

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Cited by:
  1. Edwards, Sebastian, 1982. "Exchange rates and `news': A multi-currency approach," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 211-224, January.
  2. Pilbeam, Keith, 2005. "The relative effectiveness of sterilized and non sterilized foreign exchange market interventions," Journal of Policy Modeling, Elsevier, vol. 27(3), pages 375-383, April.
  3. Sebastian Edwards, 1981. "Floating Excahnge Rates, Exectations and New Information," UCLA Economics Working Papers 227, UCLA Department of Economics.
  4. Edwards, Sebastian, 1983. "Floating exchange rates, expectations and new information," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 321-336.

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