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Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?

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  • Sarno, Lucio
  • Taylor, Mark P

Abstract

In this Paper we assess the progress made by the profession in understanding whether and how exchange rate intervention works. To this end, we review the theory and evidence on official intervention, concentrating primarily on work published within the last decade or so. Our reading of the recent literature leads us to conclude that, in contrast with the profession's consensus view of the 1980s, official intervention can be effective, especially through its role as a signal of policy intentions, and especially when it is publicly announced and concerted. We also note, however, an apparent empirical puzzle concerning the secrecy of much intervention and suggest an additional way in which intervention may be effective but which has so far received little attention in the literature, namely through its role in remedying a coordination failure in the foreign exchange market.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2690.

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Date of creation: Feb 2001
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Handle: RePEc:cpr:ceprdp:2690

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Keywords: Nonlinear Dynamics; Purchasing Power Parity; Real Exchange Rate; Test Power; Unit Root Test;

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