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The Mechanics of Central Bank Intervention in Foreign Exchange Markets

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Author Info
Basu, Kaushik (Cornell University)
Abstract

Central banks in developing countries, wanting to devalue the domestic currency, usually intervene in the foreign exchange market by buying up foreign currency using domestic money--often backing this up with sterilization to counter inflationary pressures. Such interventions are usually effective in devaluing the currency but lead to a build up of foreign exchange reserves beyond what the central bank may need. The present paper analyzes the 'mechanics' of such central bank interventions and, using techniques of industrial organization theory, proposes new kinds of interventions which have the same desired effect on the exchange rate, without causing a build up of reserves.

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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 09-02.

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Date of creation: Jan 2009
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Handle: RePEc:ecl:corcae:09-02

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
F31 - International Economics - - International Finance - - - Foreign Exchange
G20 - Financial Economics - - Financial Institutions and Services - - - General
L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs

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This page was last updated on 2009-12-4.

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