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What has Foreign Market Intervention Since the Plaza Agreement Accomplished?

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  • Michael D. Bordo
  • Anna J. Schwartz

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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Bibliographic Info

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: Dec 1990
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Publication status: published as Open Economies Review, Vol. 2, pp. 39-64, (1991).
Handle: RePEc:nbr:nberwo:3562

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  1. Dominguez, Kathryn & Frankel, Jeffrey A., 1990. "Does Foreign Exchange Intervention Matter? Disentangling the Portfolio an Expectations Effects for the Mark," Department of Economics, Working Paper Series qt84c522k9, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. 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.
  3. 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.
  4. Dornbusch, Rudiger & Frankel, Jeffrey, 1988. "The Flexible Exchange Rate System: Experience and Alternatives," Department of Economics, Working Paper Series qt5ct1w459, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Dominguez, Kathryn Mary, 1990. "Market responses to coordinated central bank intervention," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 32(1), pages 121-163, January.
  6. Maurice Obstfeld, 1988. "The Effectiveness of Foreign-Exchange Intervention: Recent Experience," NBER Working Papers 2796, National Bureau of Economic Research, Inc.
  7. 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.).
  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.
  9. 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.
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Cited by:
  1. Heejoon Kang & Michele Fratianni, 1993. "International equality of stock market returns," Open Economies Review, Springer, vol. 4(4), pages 381-401, December.
  2. Byrne, Joseph P. & Nagayasu, Jun, 2010. "Structural breaks in the real exchange rate and real interest rate relationship," Global Finance Journal, Elsevier, vol. 21(2), pages 138-151.
  3. Thomas Willett, 1999. "Developments in the Political Economy of Policy Coordination," Open Economies Review, Springer, vol. 10(2), pages 221-253, May.
  4. Alfred Broaddus & Marvin Goodfriend, 1996. "Foreign exchange operations and the Federal Reserve," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 1-20.
  5. St├ęphanie Guichard, 1998. "La politique mon├ętaire et la crise japonaise," Working Papers 1998-06, CEPII research center.

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