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What has Foreign Market Intervention Since the Plaza Agreement Accomplished?

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Michael D. Bordo
Anna J. Schwartz

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Abstract

We review the conduct and scale of official intervention by monetary authorities in the U.S.A., Japan, and West Germany since the Plaza Agreement. Relative to trading volume and the stock of internationally traded assets denominated in foreign currencies, intervention is small--scale and sporadic, hence at best limited to transitory effects. It does not appear to reduce volatility of daily exchange rates. Monetary authorities gamble that they will not suffer losses on their foreign currency holdings. Evidence in favor of sterilized foreign exchange market intervention as a way of conveying information to the private sector is far from convincing. Since changes in relative monetary growth rates are sufficient to alter bilateral exchange rates, monetary authorities can achieve their exchange rate preferences with domestic monetary policy, but at the cost of Possible distortionary effects on monetary growth rates, domestic interest rates, and international capital flows.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3562.

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Date of creation: Sep 1991
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Handle: RePEc:nbr:nberwo:3562

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  1. Frankel, Jeffrey A., 1982. "In search of the exchange risk premium: A six-currency test assuming mean-variance optimization," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 255-274, January. [Downloadable!] (restricted)
  2. Michael P. Leahy, 1989. "The profitability of U.S. intervention," International Finance Discussion Papers 343, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Dominguez, K.M., 1989. "Market Responses To Coordinated Central Bank Intervention," Papers 179d, Harvard - J.F. Kennedy School of Government.
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  4. Rudiger Dornbusch & Jeffrey A. Frankel, 1989. "The Flexible Exchange Rate System: Experience and Alternatives," NBER Working Papers 2464, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Mussa, Michael, 1979. "Empirical regularities in the behavior of exchange rates and theories of the foreign exchange market," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 11(1), pages 9-57, January. [Downloadable!] (restricted)
  6. Loopesko, Bonnie E., 1984. "Relationships among exchange rates, intervention, and interest rates: An empirical investigation," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 257-277, December. [Downloadable!] (restricted)
  7. Kathryn Dominguez and Jeffrey A. Frankel., 1990. "Does Foreign Exchange Intervention Matter? Disentangling the Portfolio and Expectations Effects for the Mark," Economics Working Papers 90-133, University of California at Berkeley.
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  8. Rogoff, Kenneth, 1984. "On the effects of sterilized intervention : An analysis of weekly data," Journal of Monetary Economics, Elsevier, vol. 14(2), pages 133-150, September. [Downloadable!] (restricted)
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