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Intervention and Exchange Rate Stabilization Policy in Developing Countries

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  • Michael M. Hutchison

Abstract

Recent evidence based on event studies demonstrates the short‐run effectiveness of sterilized (non‐monetary) intervention to stabilize exchange rates. This role is especially important for developing economies where currency volatility is frequently tied to unstable market expectations, herding behaviour and contagion, rather than ‘fundamental’ macroeconomic imbalances. Intervention coordinated with several governments is more likely to succeed in moving exchange rates in the desired direction. The Chiang Mai Initiative (CMI) is a step towards greater cooperation on exchange rate management in Asia, but its main component is a limited US dollar swap agreement between Japan and developing economies and is conditional on an IMF financial package. A much stronger political, as well as economic, commitment to intervene in exchange markets than currently embodied in the CMI would be needed to reduce exchange rate volatility in the region and to ward off future speculative attacks. Greater currency stability, in turn, would give developing economies more flexibility to use monetary and fiscal policy to pursue domestic stabilization policy objectives.

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  • Michael M. Hutchison, 2003. "Intervention and Exchange Rate Stabilization Policy in Developing Countries," International Finance, Wiley Blackwell, vol. 6(1), pages 109-127, March.
    • Handle: RePEc:bla:intfin:v:6:y:2003:i:1:p:109-127
    DOI: 10.1111/1468-2362.00108
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    Cited by:

    1. Lukas Menkhoff, 2013. "Foreign Exchange Intervention in Emerging Markets: A Survey of Empirical Studies," The World Economy, Wiley Blackwell, vol. 36(9), pages 1187-1208, September.
    2. Tony Cavoli & Ramkishen S. Rajan, 2006. "Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of Monetary Sterilization," Asian Economic Journal, East Asian Economic Association, vol. 20(4), pages 409-423, December.
    3. James Riedel, 2018. "The costs and benefits of exchange rate protection in China," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 32(1), pages 3-17, May.
    4. Tony Cavoli & Ramkishen S. Rajan, 2006. "Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of Monetary Sterilization," Asian Economic Journal, East Asian Economic Association, vol. 20(4), pages 409-423, December.
    5. Catalán-Herrera, Juan, 2016. "Foreign exchange market interventions under inflation targeting: The case of Guatemala," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 42(C), pages 101-114.
    6. Pontines, Victor & Luvsannyam, Davaajargal & Atarbaatar, Enkhjin & Munkhtsetseg, Ulziikhutag, 2021. "The effectiveness of currency intervention: Evidence from Mongolia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).

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