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

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Christopher J. Neely

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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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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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  38. Fischer, Andreas M & Zurlinden, Mathias, 1999. "Exchange Rate Effects of Central Bank Interventions: An Analysis of Transaction Prices," Economic Journal, Royal Economic Society, vol. 109(458), pages 662-76, October. [Downloadable!] (restricted)
  39. Payne, Richard & Vitale, Paolo, 2003. "A transaction level study of the effects of central bank intervention on exchange rates," Journal of International Economics, Elsevier, vol. 61(2), pages 331-352, December. [Downloadable!] (restricted)
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  41. repec:rus:hseeco:21608 is not listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michel Beine & Paul De Grauwe & Marianna Grimaldi, 2005. "The Impact of FX Central Bank Intervention in a Noise Trading Framework," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Michel Beine & Oscar Bernal, 2005. "Why do central banks intervene secretly? Preliminary evidence from the BoJ," Working Papers DULBEA 05-09.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
    Other versions:
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