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Official Intervention in the Foreign Exchange Market

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Author Info

  • Jorge Iván Canales Kriljenko
  • Cem Karacadag
  • Roberto Pereira Guimarães
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    Abstract

    This paper offers guidance on the operational aspects of official intervention in the foreign exchange market, particularly in developing countries with flexible exchange rate regimes. A brief survey of the literature and country experience is followed by an analysis of the objectives, timing, amount, degree of transparency, and choice of markets and counterparties in conducting intervention. The analysis highlights the difficulty of detecting exchange rate misalignments and disorderly markets, and argues in favor of parsimony in official intervention. Determining the timing and amount of intervention is a highly subjective excercise, and some degree of discretion is almost necessary, though policy rules may serve as "rules of thumb."

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/152.

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    Length: 41
    Date of creation: 01 Jul 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/152

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    Related research

    Keywords: Intervention; exchange rate; central bank; foreign exchange; central banks; foreign exchange market; exchange rates; exchange rate volatility; reserve bank; foreign exchange operations; exchange operations; exchange rate regimes; flexible exchange rate; reserve accumulation; exchange markets; foreign exchange markets; exchange controls; balance of payments; flexible exchange rate regimes; exchange rate policy; domestic currency; exchange rate policies; exchange rate regime; external liquidity; exchange rate misalignment; exchange rate expectations; exchange rate movements; currency debt; foreign exchange swaps; exchange rate fluctuations; exchange rate level; exchange purchases; foreign exchange purchases; exchange swaps; exchange arrangements; foreign exchange controls; foreign exchange reserves; foreign currency debt; exchange rate target; exchange rate pressures; floating exchange rate; exchange market exchange rate misalignments; exchange rate changes; exchange reserves; exchange rate risk; exchange rate flexibility; exchange rate determination; currency composition; real exchange rate; currency markets; external borrowing; exchange rate overvaluation; exchange rate levels; repayment capacity; exchange restrictions; exchange rate adjustment; currency appreciation; currency crisis; flexible exchange rate regime; floating exchange rate regimes; exchange rate depreciation; currency crises; spot exchange rate; foreign exchange transactions; foreign currency debts; real exchange rate overvaluation; currency basket; foreign exchange auctions; floating exchange rate regime; short-term debt; exchange rate currency sales; real effective exchange rates; exchange transactions; exchange rate dynamics; effective exchange rate; exchange rate guarantee; currency debts; surveillance over exchange rate policies; effective exchange rates; undervalued exchange rate; external shocks; equilibrium exchange rate; public sector debt; exchange rate volatilities; exchange rate arrangements; currency exchange; exchange auctions; real effective exchange rate; multiple exchange rate; currency exchange rates; exchange rate instability; exchange rate need; exchange rate risks; implicit exchange rate guarantee; exchange rate losses; currency depreciation; exchange rate management; reserve currencies; current account; exchange sales; flexible exchange rates; repayment capacities; foreign exchange earnings; foreign exchange sales; exchange earnings;

    References

    References listed on IDEAS
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    1. Ramana Ramaswamy & Hossein Samiei, 2000. "The Yen-Dollar Rate," IMF Working Papers 00/95, International Monetary Fund.
    2. Hung, Juann H, 1997. "Intervention strategies and exchange rate volatility: a noise trading perspective," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 779-793, September.
    3. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
    4. Jones, Michael, 1984. "Optimal Foreign Exchange Market Intervention: Evidence from the Bretton Woods Era," The Review of Economics and Statistics, MIT Press, vol. 66(2), pages 242-55, May.
    5. Takatoshi Ito, 2002. "Is Foreign Exchange Intervention Effective?: The Japanese Experiences in the 1990s," NBER Working Papers 8914, National Bureau of Economic Research, Inc.
    6. Jorion, Philippe, 1995. " Predicting Volatility in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 50(2), pages 507-28, June.
    7. Dominguez, Kathryn M. E., 2003. "The market microstructure of central bank intervention," Journal of International Economics, Elsevier, vol. 59(1), pages 25-45, January.
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    14. Ramon Moreno, 1997. "Lessons from Thailand," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov7.
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    20. Ilker Domac & Alfonso Mendoza, 2002. "Is there Room for Forex Interventions under Inflation Targeting Framework? Evidence from Mexico and Turkey," Discussion Papers 0206, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
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    23. Zapatero, Fernando & Reverter, Luis F., 2003. "Exchange rate intervention with options," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 289-306, April.
    24. repec:imf:imfwpa:01/43 is not listed on IDEAS
    25. Guy Meredith & Menzie D. Chinn, 1998. "Long-Horizon Uncovered Interest Rate Parity," NBER Working Papers 6797, National Bureau of Economic Research, Inc.
    26. Evan Tanner, 1998. "Deviations From Uncovered Interest Parity," IMF Working Papers 98/117, International Monetary Fund.
    27. William H. Branson & Jacob A. Frenkel & Morris Goldstein, 1990. "International Policy Coordination and Exchange Rate Fluctuations," NBER Books, National Bureau of Economic Research, Inc, number bran90-1, May.
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    29. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
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    Citations

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    Cited by:
    1. Kiss M., Norbert, 2005. "A jegybanki devizapiaci intervenció hatékonysága. Nemzetközi tapasztalatok és elméleti megfontolások
      [Effectiveness of central-bank intervention on foreign-exchange markets. International ex
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 846-872.
    2. Ewe-Ghee Lim, 2006. "The Euro's Challenge to the Dollar," IMF Working Papers 06/153, International Monetary Fund.
    3. Dimitrios A. Sideris, 2007. "Foreign Exchange Intervention and Equilibrium Real Exchange Rates," Working Papers 56, Bank of Greece.
    4. Gilda Fernandez & Cem Karacadag & Rupa Duttagupta, 2004. "From Fixed to Float," IMF Working Papers 04/126, International Monetary Fund.
    5. David Archer, 2005. "Foreign exchange market intervention: methods and tactics," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 40-55 Bank for International Settlements.
    6. Piti Disyatat & Gabriele Galati, 2005. "The effectiveness of foreign exchange intervention in emerging market countries," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 97-113 Bank for International Settlements.
    7. Adam Gersl & Tomás Holub, 2006. "Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience," Contemporary Economic Policy, Western Economic Association International, vol. 24(4), pages 475-491, October.
    8. Kim, Suk-Joong, 2007. "Intraday evidence of efficacy of 1991-2004 Yen intervention by the Bank of Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(4), pages 341-360, October.
    9. Disyatat, Piti & Galati, Gabriele, 2007. "The effectiveness of foreign exchange intervention in emerging market countries: Evidence from the Czech koruna," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 383-402, April.
    10. Balázs Égert & Maroje Lang, 2005. "Foreign Exchange Interventions in Croatia and Turkey: Should We Give a Damn?," William Davidson Institute Working Papers Series wp755, William Davidson Institute at the University of Michigan.
    11. Tomas Holub, 2005. "Forex interventions: the Czech experience," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 150-61 Bank for International Settlements.
    12. Levent Korap, 2006. "An Analysis of Central Bank Interventions on Forex Market For The Post-Crisis Period," Working Papers 2006/4, Turkish Economic Association.
    13. Roberto Guimaraes & Cem Karacadag, 2005. "The Empirics of Foreign Exchange Intervention in Emerging Market Countries The Cases of Mexico and Turkey," Money Macro and Finance (MMF) Research Group Conference 2005 68, Money Macro and Finance Research Group.
    14. Faruk Selçuk, 2005. "The Policy Challenge with Floating Exchange Rates: Turkey’s Recent Experience," Open Economies Review, Springer, vol. 16(3), pages 295-312, July.
    15. Cem Karacadag & Roberto Pereira Guimarães, 2004. "The Empirics of Foreign Exchange Intervention in Emerging Markets," IMF Working Papers 04/123, International Monetary Fund.
    16. José Darío Uribe & Jorge Toro, 2005. "Foreign exchange market intervention in Colombia," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 139-49 Bank for International Settlements.

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