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The case for foreign exchange intervention: the government as an active reserve manager

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  • Christopher J. Neely

Abstract

This paper argues that major governments should actively manage their foreign exchange portfolios to maximize the risk-adjusted return to the taxpayer by exploiting long-term, fundamental based predictability in floating exchange rates. Such transactions—equivalent to foreign exchange intervention—would improve welfare by transferring risk from private agents to the risk-tolerant government. Interventions explicitly designed to profit the reserve management authority would be more likely to be successful and, to the extent that they are, would reduce resource misallocation.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2004-031.

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Date of creation: 2005
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Handle: RePEc:fip:fedlwp:2004-031

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Keywords: Foreign exchange;

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References

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  44. repec:rus:hseeco:21608 is not listed on IDEAS
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Cited by:
  1. Reitz, Stefan & Ruelke, Jan C. & Taylor, Mark P., 2010. "On the nonlinear influence of Reserve Bank of Australia interventions on exchange rates," Discussion Paper Series 1: Economic Studies 2010,08, Deutsche Bundesbank, Research Centre.
  2. Michel Beine & Paul De Grauwe & Marianna Grimaldi, 2008. "The impact of FX Central Bank Intervention in a Noise Trading Framework," CREA Discussion Paper Series 08-15, Center for Research in Economic Analysis, University of Luxembourg.
  3. Michel Beine & Oscar Bernal Diaz, 2005. "Why do Central Banks intervene secretly? preliminary evidence of the BoJ," DULBEA Working Papers in, ULB -- Universite Libre de Bruxelles.

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