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Effective Foreign Exchange Intervention: Matching Strategies with Objectives

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  • King, Michael R

Abstract

Foreign exchange intervention may be undertaken to meet a range of objectives. Empirical work conducted to test the effectiveness of intervention does not adequately address how these objectives may vary over time. As a result, these studies overwhelmingly find that foreign exchange intervention has only a transitory effect on the level or volatility of the exchange rate. These studies suggest strategies that may increase the short-term effectiveness of intervention. Intervention to pursue policy objectives should be announced, supported by macro economic policy, coordinated with other monetary authorities, and conducted "against the wind". Intervention targeting tactical objectives should be conducted secretly, "with the wind", in large size and timed for maximum impact. Copyright 2003 by Blackwell Publishers Ltd.

Suggested Citation

  • King, Michael R, 2003. "Effective Foreign Exchange Intervention: Matching Strategies with Objectives," International Finance, Wiley Blackwell, vol. 6(2), pages 249-271, Summer.
  • Handle: RePEc:bla:intfin:v:6:y:2003:i:2:p:249-71
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    References listed on IDEAS

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    1. Payne, Richard & Vitale, Paolo, 2003. "A transaction level study of the effects of central bank intervention on exchange rates," Journal of International Economics, Elsevier, vol. 61(2), pages 331-352, December.
    2. Rogers, J. M. & Siklos, P. L., 2003. "Foreign exchange market intervention in two small open economies: the Canadian and Australian experience," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 393-416, June.
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    4. Rasmus Fatum & Michael M. Hutchison, "undated". "Is Foreign Exchange Market Intervention an Alternative to Monetary Policy? Evidence from Japan," EPRU Working Paper Series 02-11, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    5. Anna J. Schwartz, 2000. "The Rise and Fall of Foreign Exchange Market Intervention," NBER Working Papers 7751, National Bureau of Economic Research, Inc.
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    7. Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-10.
    8. Maurice Obstfeld, 1988. "The Effectiveness of Foreign-Exchange Intervention: Recent Experience," NBER Working Papers 2796, National Bureau of Economic Research, Inc.
    9. Hung, Juann H, 1997. "Intervention strategies and exchange rate volatility: a noise trading perspective," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 779-793, September.
    10. Rasmus Fatum & Michael M. Hutchison, 2003. "Is sterilised foreign exchange intervention effective after all? an event study approach," Economic Journal, Royal Economic Society, vol. 113(487), pages 390-411, April.
    11. 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,.
    12. Dominguez, Kathryn M. E., 2003. "The market microstructure of central bank intervention," Journal of International Economics, Elsevier, vol. 59(1), pages 25-45, January.
    13. Ramana Ramaswamy & Hossein Samiei, 2000. "The Yen-Dollar Rate; Have Interventions Mattered?," IMF Working Papers 00/95, International Monetary Fund.
    14. repec:syd:wpaper:99-05 is not listed on IDEAS
    15. Fischer, Andreas M & Zurlinden, Mathias, 1999. "Exchange Rate Effects of Central Bank Interventions: An Analysis of Transaction Prices," Economic Journal, Royal Economic Society, vol. 109(458), pages 662-676, October.
    16. 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.
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    Citations

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    Cited by:

    1. David Archer, 2005. "Foreign exchange market intervention: methods and tactics," BIS Papers chapters,in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 40-55 Bank for International Settlements.
    2. Lukas Menkhoff, 2010. "High-Frequency Analysis Of Foreign Exchange Interventions: What Do We Learn?," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 85-112, February.
    3. 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.
    4. Disyatat, Piti & Galati, Gabriele, 2007. "The effectiveness of foreign exchange intervention in emerging market countries: Evidence from the Czech koruna," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 383-402, April.
    5. Smita Roy Trivedi & P. G. Apte, 2016. "Central Bank Intervention in USD/INR Market: Estimating Its Reaction Function and Impact on Volatility," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 23(3), pages 263-279, September.
    6. Piti Disyatat & Gabriele Galati, 2005. "The effectiveness of foreign exchange intervention in emerging market countries," BIS Papers chapters,in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 97-113 Bank for International Settlements.
    7. Michael R. King & Rasmus Fatum, 2005. "The Effectiveness of Official Foreign Exchange Intervention in a Small Open Economy: The Case of the Canadian Dollar," Staff Working Papers 05-21, Bank of Canada.
    8. Juan David Durán-Vanegas, 2015. "Do foreign exchange interventions work as coordinating signals in Colombia?," Revista Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 33(78), pages 169-175, December.
    9. Nuttathum Chutasripanich & James Yetman, 2015. "Foreign exchange intervention: strategies and effectiveness," BIS Working Papers 499, Bank for International Settlements.
    10. Rasmus Fatum & Michael R. King, 2005. "Rules versus Discretion in Foreign Exchange Intervention: Evidence from Official Bank of Canada High-Frequency Data," EPRU Working Paper Series 05-06, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    11. Sfia, Mohamed Daly, 2007. "Régimes de change: Le chemin vers la flexibilité," MPRA Paper 4085, University Library of Munich, Germany.
    12. Eria Hisali, 2012. "The Efficacy Of Central Bank Intervention On The Foreign Exchange Market: Uganda'S Experience," Journal of International Development, John Wiley & Sons, Ltd., vol. 24(2), pages 185-207, March.
    13. Kiss M., Norbert, 2005. "A jegybanki devizapiaci intervenció hatékonysága. Nemzetközi tapasztalatok és elméleti megfontolások
      [Effectiveness of central-bank intervention on foreign-exchange markets. International experienc
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 846-872.
    14. Paul Moser-Boehm, 2005. "Governance aspects of foreign exchange interventions," BIS Papers chapters,in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 19-39 Bank for International Settlements.

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