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Exchange Rate Variability and Exchange Market Intervention: Spot vs. Forward

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  • Hui-Kuan Tseng

Abstract

The paper compares forward and spot market interventions by examining their effects on exchange rate fluctuations. Using a stochastic partial equilibrium model, it is shown that the two interventions fail to limit spot rate fluctuations caused by shocks that do not perturb traders' hedging activity directly. When shocks perturb this hedging activity in the first place, however, it is shown that intervention via spot exchange may trigger very large fluctuations once it cannot sufficiently counteract hedgers' and speculators' combined response to risk premia. In this case, by contrast, the forward intervention can dampen exchange rate variability. [F31]

Suggested Citation

  • Hui-Kuan Tseng, 1998. "Exchange Rate Variability and Exchange Market Intervention: Spot vs. Forward," International Economic Journal, Taylor & Francis Journals, vol. 12(2), pages 1-16.
    • Handle: RePEc:taf:intecj:v:12:y:1998:i:2:p:1-16
    DOI: 10.1080/10168739800000010
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    References listed on IDEAS

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    1. S. C. Tsiang, 1959. "The Theory of Forward Exchange and Effects of Government Intervention on the Forward Exchange Market," IMF Staff Papers, Palgrave Macmillan, vol. 7(1), pages 75-106, April.
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    3. Jonathan Eaton & Stephen J. Turnovsky, 1984. "The Forward Exchange Market, Speculation, and Exchange Market Intervention," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(1), pages 45-69.
    4. Eaton, Jonathan & Turnovsky, Stephen J, 1983. "Exchange Risk, Political Risk, and Macroeconomic Equilibrium," American Economic Review, American Economic Association, vol. 73(1), pages 183-189, March.
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    6. Kawai, Masahiro, 1984. "The effect of forward exchange on spot-rate volatility under risk and rational expectations," Journal of International Economics, Elsevier, vol. 16(1-2), pages 155-172, February.
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    Cited by:

    1. Lin, Hwan C., 2008. "Forward-rate target zones and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 831-846, September.

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