Does central bank intervention stabilize foreign exchange rates?
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.
Volume (Year): (1996)
Issue (Month): Q I ()
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- 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 611-20, November.
- 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.
- 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.
- 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.
- Graciela L. Kaminsky & Karen K. Lewis, 1993.
"Does foreign exchange intervention signal future monetary policy?,"
Finance and Economics Discussion Series
93-1, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- Graciela Kaminsky & Karen K. Lewis, 1993. "Does Foreign Exchange Intervention Signal Future Monetary Policy?," NBER Working Papers 4298, National Bureau of Economic Research, Inc.
- Kaminsky, G.L. & Lewis, K.K., 1992. "Does Foreign Exchange Intervention Signal Future Monetary Policy?," Weiss Center Working Papers 93-3, Wharton School - Weiss Center for International Financial Research.
- Graciela L. Kaminsky & Karen K. Lewis, 1996. "Does foreign exchange intervention signal future monetary policy?," Working Papers 96-7, Federal Reserve Bank of Philadelphia.
- 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.
- Sean Becketti & Gordon H. Sellon, 1989. "Has financial market volatility increased?," Economic Review, Federal Reserve Bank of Kansas City, issue Jun, pages 17-30.
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