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Is Official Exchange Rate Intervention Effective?

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  • Taylor, Mark

Abstract

I examine the effectiveness of exchange rate intervention within the context of a Markov-switching model for the real exchange rate. The probability of switching between stable and unstable regimes depends non-linearly upon the amount of intervention, the degree of misalignment and the duration of the regime. Applying this to dollar-mark data for the period 1985-98, I find that intervention increases the probability of stability when the rate is misaligned, and that its influence grows with the degree of misalignment. Intervention within a small neighbourhood of equilibrium will result in a greater probability of instability.

Suggested Citation

  • Taylor, Mark, 2003. "Is Official Exchange Rate Intervention Effective?," CEPR Discussion Papers 3758, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3758
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    References listed on IDEAS

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    Cited by:

    1. Lukas Menkhoff, 2010. "High‐Frequency Analysis Of Foreign Exchange Interventions: What Do We Learn?," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 85-112, February.
    2. Owen F. Humpage, 2003. "Government intervention in the foreign exchange market," Working Papers (Old Series) 0315, Federal Reserve Bank of Cleveland.
    3. Christopher J. Neely, 2006. "Identifying the effects of U.S. intervention on the levels of exchange rates," Working Papers 2005-031, Federal Reserve Bank of St. Louis.
    4. Marcel Fratzscher, 2008. "Oral Interventions Versus Actual Interventions in Fx Markets - An Event-Study Approach," Economic Journal, Royal Economic Society, vol. 118(530), pages 1079-1106, July.
    5. Dominguez, Kathryn M.E., 2006. "When do central bank interventions influence intra-daily and longer-term exchange rate movements?," Journal of International Money and Finance, Elsevier, vol. 25(7), pages 1051-1071, November.
    6. Hassan Suleiman & Zahid Muhammad, 2011. "The real exchange rate of an oil exporting economy: Empirical evidence from Nigeria," FIW Working Paper series 072, FIW.
    7. C. Randall Henning, 2007. "Organizing Foreign Exchange Intervention in the Euro Area," Journal of Common Market Studies, Wiley Blackwell, vol. 45, pages 315-342, June.
    8. Fratzscher, Marcel, 2005. "How successful are exchange rate communication and interventions? Evidence from time-series and event-study approaches," Working Paper Series 528, European Central Bank.

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    More about this item

    Keywords

    Real exchange rate; Official intervention; Non-linearity; Mean reversion;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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