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The Scope For Foreign Exchange Market Interventions

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  • PETER BOFINGER

    (University of Wuerzburg, Department of Economics, Sanderring 2, 97070 Wuerzburg, Germany)

Abstract

The discussion on exchange rate policy is dominated by the so-called "impossible trinity". In this paper, a strategy of managed floating is developed that allows one to transform the "impossible trinity" into a "possible trinity". If a central bank targets an exchange rate path which is determined by uncovered interest parity (UIP), it can at the same time set its policy rate autonomously. As a UIP path removes the incentives for carry-trade, it is also compatible with capital mobility. The approach can be used unilaterally to prevent carry trade as a central bank can always prevent an appreciation of its currency. But it can also be applied bilaterally or multilaterally. Successful examples are the European Monetary System and the exchange rate policy of Slovenia before its EMU membership.

Suggested Citation

  • Peter Bofinger, 2012. "The Scope For Foreign Exchange Market Interventions," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 1-28.
    • Handle: RePEc:wsi:jicepx:v:03:y:2012:i:03:n:s1793993312500184
    DOI: 10.1142/S1793993312500184
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    References listed on IDEAS

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    More about this item

    Keywords

    International monetary system; managed floating; foreign exchange market interventions; uncovered interest parity; carry trade; inflation targeting; F31; F32; F33;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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