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Intervention and Exchange Rate Stabilization Policy in Developing Countries

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  • Hutchison, Michael M

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. Copyright 2003 by Blackwell Publishers Ltd.

Suggested Citation

  • Hutchison, Michael M, 2003. "Intervention and Exchange Rate Stabilization Policy in Developing Countries," International Finance, Wiley Blackwell, vol. 6(1), pages 109-127, Spring.
  • Handle: RePEc:bla:intfin:v:6:y:2003:i:1:p:109-27
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    References listed on IDEAS

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    Cited by:

    1. Tony Cavoli & Ramkishen S. Rajan, 2005. "The Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of Monetary Sterilization," SCAPE Policy Research Working Paper Series 0518, National University of Singapore, Department of Economics, SCAPE.
    2. 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.
    3. Juan David Durán-Vanegas, 2015. "Do foreign exchange interventions work as coordinating signals in Colombia?," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 33(78), pages 169-175, Diciembre.
    4. 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.
    5. Owen F. Humpage, 2003. "Government intervention in the foreign exchange market," Working Paper 0315, Federal Reserve Bank of Cleveland.
    6. Herman Kamil, 2008. "Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia," IMF Working Papers 08/88, International Monetary Fund.

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