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How to devalue exchange rates, without building up reserves: Strategic theory for central banking

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  • Basu, Kaushik

Abstract

Central banks, wanting to devalue their currency, often intervene in the foreign exchange market by buying up foreign currency. Such interventions even if effective lead to a build up of foreign exchange reserves. This paper argues that the coupling of devaluation and reserve build up can be avoided if the central bank intervention takes the form of a ‘schedule’, that is, commitment to buying and selling conditional on the exchange rate.

Suggested Citation

  • Basu, Kaushik, 2012. "How to devalue exchange rates, without building up reserves: Strategic theory for central banking," Economics Letters, Elsevier, vol. 117(3), pages 758-761.
  • Handle: RePEc:eee:ecolet:v:117:y:2012:i:3:p:758-761 DOI: 10.1016/j.econlet.2011.12.069
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    References listed on IDEAS

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    1. Basu, Kaushik & Morita, Hodaka, 2006. "International credit and welfare: A paradoxical theorem and its policy implications," European Economic Review, Elsevier, vol. 50(6), pages 1507-1528, August.
    2. Encaoua, David & Jacquemin, Alexis, 1980. "Degree of Monopoly, Indices of Concentration and Threat of Entry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 87-105, February.
    3. Bresnahan, Timothy F, 1981. "Duopoly Models with Consistent Conjectures," American Economic Review, American Economic Association, vol. 71(5), pages 934-945, December.
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    Cited by:

    1. Saglam, Ismail, 2017. "Non-Sterilized Interventions May Yield Perverse Effects on Spot Foreign Exchange Rates," MPRA Paper 78284, University Library of Munich, Germany.
    2. Nuttathum Chutasripanich & James Yetman, 2015. "Foreign exchange intervention: strategies and effectiveness," BIS Working Papers 499, Bank for International Settlements.

    More about this item

    Keywords

    Exchange rate; Central bank intervention; Currency dealers; Oligopoly;

    JEL classification:

    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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