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Does central bank intervention stabilize foreign exchange rates?

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  • Catherine Bonser-Neal

Abstract

Since the adoption of a flexible exchange rate system in 1973, central banks of most industrialized countries have continued to intervene in foreign exchange markets. One reason is that exchange rate volatility has increased. To reduce volatility, many European countries have agreed to keep exchange rates within a band around a target exchange rate, implementing this policy by intervening in foreign exchange markets when necessary. Even without an explicit exchange rate commitment, countries such as the United States and Japan have intervened in foreign exchange markets to help stabilize exchange rates.> Opinions differ on whether central banks can stabilize exchange rates. Some analysts believe central bank intervention can reduce exchange rate volatility by stopping speculative attacks against a currency. Other analysts, though, believe central bank intervention may increase volatility if the intervention contributes to market uncertainty or encourages speculative attacks against the currency.> Bonser-Neal presents empirical evidence on this controversy. Her evidence suggests that central bank intervention does not generally reduce exchange rate volatility. Rather, central bank intervention typically appears to have had little effect on volatility.

Suggested Citation

  • Catherine Bonser-Neal, 1996. "Does central bank intervention stabilize foreign exchange rates?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 43-57.
  • Handle: RePEc:fip:fedker:y:1996:i:qi:p:43-57:n:v.81no.1
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    File URL: http://www.kansascityfed.org/publicat/econrev/pdf/1q96bons.pdf
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    References listed on IDEAS

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    1. Bailey, Warren Bernard, 1988. "Money Supply Announcements and the Ex Ante Volatility of Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 611-620, November.
    2. 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.
    3. 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.
    4. Barone-Adesi, Giovanni & Whaley, Robert E, 1987. " Efficient Analytic Approximation of American Option Values," Journal of Finance, American Finance Association, vol. 42(2), pages 301-320, June.
    5. Sean Becketti & Gordon H. Sellon, 1989. "Has financial market volatility increased?," Economic Review, Federal Reserve Bank of Kansas City, issue Jun, pages 17-30.
    6. Madura, Jeff & Tucker, Alan L., 1992. "Trade deficit surprises and the ex ante volatility of foreign exchange rates," Journal of International Money and Finance, Elsevier, vol. 11(5), pages 492-501, October.
    7. Kathryn M. Dominguez, 1993. "Does Central Bank Intervention Increase the Volatility of Foreign Exchange Rates?," NBER Working Papers 4532, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. K. Doroodian & Tony Caporale, 2001. "Central bank intervention and foreign exchange volatility," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 7(4), pages 385-392, November.
    2. Woosik Moon & Yeongseop Rhee, 2006. "Spot and foward market intervention during the 1997 Korean currency crisis," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 59(238), pages 243-268.
    3. Nagayasu, Jun, 2004. "The effectiveness of Japanese foreign exchange interventions during 1991-2001," Economics Letters, Elsevier, vol. 84(3), pages 377-381, September.
    4. Domowitz, Ian & El-Gamal, Mahmoud A., 2001. "A consistent nonparametric test of ergodicity for time series with applications," Journal of Econometrics, Elsevier, vol. 102(2), pages 365-398, June.
    5. Johnson, Christian A., 2001. "Un modelo de intervención cambiaria," El Trimestre Económico, Fondo de Cultura Económica, vol. 0(271), pages 339-367, julio-sep.
    6. Iván Giner & Omar Mendoza, . "Foreign exchange intervention in Venezuela," BIS Papers chapters,in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 292-300 Bank for International Settlements.
    7. Domowitz, I. El-Gamal, M., 1997. "Financial Market Structure and the Ergocicity of Prices," Working papers 9719, Wisconsin Madison - Social Systems.
    8. 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.
    9. Woosik Moon & Yeongseop Rhee, 2006. "Spot and foward market intervention during the 1997 Korean currency crisis," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 59(238), pages 243-268.
    10. Bahram Adrangi & Mary Allender & Kambiz Raffiee, 2011. "An Ex-Post Empirical Investigation of the Efficacy of Central Bank Interventions in Currency Markets: Bilateral Exchange Rate of the Dollar," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 19-34, August.

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