IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?

  • Mark P. Taylor
  • Lucio Sarno

Our paper assesses progress made by the profession in understanding whether and how exchange rate intervention works. We review theory and evidence on official intervention, concentrating primarily on work published in the last decade or so. We conclude that, unlike the profession's consensus of the 1980s, official intervention can be effective, especially as a signal of policy intentions and when publicly announced and concerted. We note an apparent empirical puzzle concerning the secrecy of much intervention and suggest another way for intervention to be effective which has received little attention in the literature, namely by remedying a coordination failure in the foreign exchange market.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jel.39.3.839
Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by American Economic Association in its journal Journal of Economic Literature.

Volume (Year): 39 (2001)
Issue (Month): 3 (September)
Pages: 839-868

as
in new window

Handle: RePEc:aea:jeclit:v:39:y:2001:i:3:p:839-868
Note: DOI: 10.1257/jel.39.3.839
Contact details of provider: Web page: https://www.aeaweb.org/journal
Email:


More information through EDIRC

Order Information: Web: https://www.aeaweb.org/subscribe.html

References listed on IDEAS
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.:

as in new window
  1. Kathryn M. Dominguez, 1989. "Market Responses To Coordinated Central Bank Intervention," NBER Working Papers 3192, National Bureau of Economic Research, Inc.
  2. Obstfeld, Maurice, 1982. "Can We Sterilize? Theory and Evidence," American Economic Review, American Economic Association, vol. 72(2), pages 45-50, May.
  3. Fabian Reeves, Silke, 1998. "Partial Credibility, Information Selection and the Signalling Channel of Sterilized Interventions," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 13, pages 108-130.
  4. Kaminsky, Graciela L. & Lewis, Karen K., 1996. "Does foreign exchange intervention signal future monetary policy?," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 285-312, April.
  5. Szakmary, Andrew C. & Mathur, Ike, 1997. "Central bank intervention and trading rule profits in foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 16(4), pages 513-535, August.
  6. Christopher J. Neely, 2000. "The practice of central bank intervention: looking under the hood," Working Papers 2000-028, Federal Reserve Bank of St. Louis.
  7. Nancy P. Marion & Robert P. Flood, 1998. "Perspectiveson the Recent Currency Crisis Literature," IMF Working Papers 98/130, International Monetary Fund.
  8. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  9. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  10. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981.
  11. Blake LeBaron, . "Technical Trading Rule Profitability and Foreign Exchange Intervention," Working papers _002, University of Wisconsin - Madison.
  12. Eijffinger, S.C.W. & Gruijters, A.P.D., 1989. "On the short term objectives of daily intervention by the Deutsche Bundesbank and the federal reserve system in the U.S. Dollar-Deutsche Mark exchange market," Research Memorandum FEW 393, Tilburg University, School of Economics and Management.
  13. Almekinders, Geert J. & Eijffinger, Sylvester C. W., 1996. "A friction model of daily Bundesbank and Federal Reserve intervention," Journal of Banking & Finance, Elsevier, vol. 20(8), pages 1365-1380, September.
  14. Stephen J. Turnovsky, 1986. "Optimal Monetary Policy and Wage Indexation Under Alternative Disturbances and Information Structures," NBER Working Papers 2042, National Bureau of Economic Research, Inc.
  15. Edison, H.J., 1993. "The Effectiveness of Central-Bank Intervention: A Survey of the Litterature after 1982," Princeton Studies in International Economics 18, International Economics Section, Departement of Economics Princeton University,.
  16. Humpage, Owen F. & Osterberg, William P., 1992. "Intervention and the foreign exchange risk premium: An empirical investigation of daily effects," Global Finance Journal, Elsevier, vol. 3(1), pages 23-50.
  17. Giuseppe Tullio & Marcio Ronci, 1997. "Central Bank Autonomy, the Exchange Rate Constraint and Inflation: The Case of Italy, 1970–1992," Open Economies Review, Springer, vol. 8(1), pages 31-49, January.
  18. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  19. 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.
  20. Backus, David K. & Kehoe, Patrick J., 1989. "On the denomination of government debt : A critique of the portfolio balance approach," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 359-376, May.
  21. Lewis, Karen K, 1995. "Are Foreign Exchange Intervention and Monetary Policy Related, and Does It Really Matter?," The Journal of Business, University of Chicago Press, vol. 68(2), pages 185-214, April.
  22. Guy Debelle, 1996. "Central Bank Independence; A Free Lunch?," IMF Working Papers 96/1, International Monetary Fund.
  23. 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.
  24. Robert P. Flood & Jagdeep S. Bhandari & Pierre-Richard Agénor, 1991. "Speculative Attacks and Models of Balance of Payments Crises," IMF Working Papers 91/99, International Monetary Fund.
  25. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
  26. Agenor, Pierre-Richard, 1994. "Credibility and exchange rate management in developing countries," Journal of Development Economics, Elsevier, vol. 45(1), pages 1-16, October.
  27. Robert P. Flood & Peter M. Garber & Charles Kramer, 1995. "Collapsing Exchange Rate Regimes: Another Linear Example," NBER Working Papers 5318, National Bureau of Economic Research, Inc.
  28. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
  29. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521466004, November.
  30. Karfakis, Costas & Kim, Suk-Joong, 1995. "Exchange rates, interest rates and current account news: some evidence from Australia," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 575-595, August.
  31. Taylor, Dean, 1982. "Official Intervention in the Foreign Exchange Market, or, Bet against the Central Bank," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 356-68, April.
  32. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Scholarly Articles 27693805, Harvard University Department of Economics.
  33. Michael P. Dooley & Peter Isard, 1983. "The Portfolio-Balance Model of Exchange Rates and Some Structural Estimates of the Risk Premium (Modèle d'équilibre de portefeuilles appliqué aux taux de change et certaines estimations (structurel," IMF Staff Papers, Palgrave Macmillan, vol. 30(4), pages 683-702, December.
  34. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  35. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  36. Bhattacharya, Utpal & Weller, Paul, 1992. "The Advantage to Hiding One's Hand: Speculation and Central Bank Intervention in the Foreign Exchange Market," CEPR Discussion Papers 737, C.E.P.R. Discussion Papers.
  37. Robert P. Flood & Peter M. Garber, 1991. "The Linkage Between Speculative Attack and Target Zone Models of Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1367-1372.
  38. Stein, Jeremy C, 1989. "Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements," American Economic Review, American Economic Association, vol. 79(1), pages 32-42, March.
  39. Sweeney, Richard J., 1997. "Do central banks lose on foreign-exchange intervention? A review article," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1667-1684, December.
  40. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper Tigers? A Model of the Asian Crisis," NBER Working Papers 6783, National Bureau of Economic Research, Inc.
  41. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
  42. Hali Edison & Pongsak Luangaram & Marcus Miller, 1998. "Asset Bubbles, Domino Effects and 'Lifeboats': Elements of the East Asian Crisis," CSGR Working papers series 05/98, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  43. Robert P. Flood & Nancy P. Marion, 1998. "Self-Fulfilling Risk Predictions; An Application to Speculative Attacks," IMF Working Papers 98/124, International Monetary Fund.
  44. Vitale, Paolo, 2000. "Speculative noise trading and manipulation in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 689-712, October.
  45. Chinn, Menzie D. & Dooley, Michael P. & Shrestha, Sona, 1999. "Latin America and East Asia in the context of an insurance model of currency crises," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 659-681, August.
  46. Robert Flood & Charles Kramer, 1996. "Economic models of speculative attacks and the drachma crisis of May 1994," Open Economies Review, Springer, vol. 7(1), pages 591-600, March.
  47. Flandreau, Marc, 1998. "The burden of intervention: externalities in multilateral exchange rates arrangements," Journal of International Economics, Elsevier, vol. 45(1), pages 137-171, June.
  48. Bonser-Neal, Catherine & Tanner, Glenn, 1996. "Central bank intervention and the volatility of foreign exchange rates: evidence from the options market," Journal of International Money and Finance, Elsevier, vol. 15(6), pages 853-878, December.
  49. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
  50. Bonser-Neal, Catherine & Roley, V Vance & Sellon, Gordon H, Jr, 1998. "Monetary Policy Actions, Intervention, and Exchange Rates: A Reexamination of the Empirical Relationships Using Federal Funds Rate Target Data," The Journal of Business, University of Chicago Press, vol. 71(2), pages 147-77, April.
  51. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  52. Tullio, Giuseppe & Natarov, Vitaly, 1999. "Daily Interventions by the Central Bank of Russia in the Treasury Bill Market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(3), pages 229-42, July.
  53. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
  54. Ghosh, A.R., 1990. "Is It Signalling Exchange Intervention And The Dollar- Deutschemark Rate," Papers 48, Princeton, Woodrow Wilson School - Discussion Paper.
  55. Chang, Yuanchen & Taylor, Stephen J., 1998. "Intraday effects of foreign exchange intervention by the Bank of Japan1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 191-210, February.
  56. Frankel, Jeffrey A., 1979. "The diversifiability of exchange risk," Journal of International Economics, Elsevier, vol. 9(3), pages 379-393, August.
  57. Nancy P. Marion & Robert P. Flood, 1997. "Policy Implications of "Second-Generation" Crisis Models," IMF Working Papers 97/16, International Monetary Fund.
  58. Allen, Helen & Taylor, Mark P, 1990. "Charts, Noise and Fundamentals in the London Foreign Exchange Market," Economic Journal, Royal Economic Society, vol. 100(400), pages 49-59, Supplemen.
  59. Balke, Nathan S & Haslag, Joseph H, 1992. "A Theory of Fed Watching in a Macroeconomic Policy Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(3), pages 619-28, August.
  60. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
  61. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476.
  62. Sarno, Lucio & Taylor, Mark P., 1999. "Moral hazard, asset price bubbles, capital flows, and the East Asian crisis:: the first tests," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 637-657, August.
  63. Weymark, Diana N, 1997. "Measuring Exchange Market Pressure and Intervention in Interdependent Economies: A Two-Country Model," Review of International Economics, Wiley Blackwell, vol. 5(1), pages 72-82, February.
  64. Garber, Peter & Taylor, Mark P, 1995. "Sand in the Wheels of Foreign Exchange Markets: A Sceptical Note," Economic Journal, Royal Economic Society, vol. 105(428), pages 173-80, January.
  65. Peter Brandner & Harald Grech & Helmut Stix, 2001. "The Effectiveness of Central Bank Intervention in the EMS: The Post 1993 Experience," Working Papers 55, Oesterreichische Nationalbank (Austrian Central Bank).
  66. Weymark, Diana N, 1997. "Measuring the degree of exchange market intervention in a small open economy," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 55-79, February.
  67. Eijffinger, S.C.W., 1993. "Central bank independence in twelve industrial countries," Other publications TiSEM 0401b17a-e2c7-4179-ace9-a, Tilburg University, School of Economics and Management.
  68. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521460477, November.
  69. Vitale, Paolo, 1999. "Sterilised central bank intervention in the foreign exchange market," Journal of International Economics, Elsevier, vol. 49(2), pages 245-267, December.
  70. Geert J. Almekinders, 1995. "Foreign Exchange Intervention," Books, Edward Elgar Publishing, number 71.
  71. Flood, Robert & Marion, Nancy, 1997. "The size and timing of devaluations in capital-controlled economies," Journal of Development Economics, Elsevier, vol. 54(1), pages 123-147, October.
  72. Stein, Jeremy C, 1987. "Informational Externalities and Welfare-Reducing Speculation," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1123-45, December.
  73. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
  74. Nouriel Roubini, 1988. "Offset and Sterilization Under Fixed Exchange Rates With An Optimizing Central Bank," NBER Working Papers 2777, National Bureau of Economic Research, Inc.
  75. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The "Overborrowing Syndrome"," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
  76. Christopher J. Neely, 1998. "Technical analysis and the profitability of U.S. foreign exchange intervention," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 3-17.
  77. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
  78. Peiers, Bettina, 1997. " Informed Traders, Intervention, and Price Leadership: A Deeper View of the Microstructure of the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 52(4), pages 1589-1614, September.
  79. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  80. Baillie, Richard T. & P. Osterberg, William, 1997. "Central bank intervention and risk in the forward market," Journal of International Economics, Elsevier, vol. 43(3-4), pages 483-497, November.
  81. Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
  82. Reeves, Silke Fabian, 1997. "Exchange rate management when sterilized interventions represent signals of monetary policy," International Review of Economics & Finance, Elsevier, vol. 6(4), pages 339-360.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:aea:jeclit:v:39:y:2001:i:3:p:839-868. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros)

or (Michael P. Albert)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.