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The Scope For Foreign Exchange Market Interventions

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  • PETER BOFINGER

    () (University of Wuerzburg, Department of Economics, Sanderring 2, 97070 Wuerzburg, Germany)

Abstract

The discussion on exchange rate policy is dominated by the so-called "impossible trinity". In this paper, a strategy of managed floating is developed that allows one to transform the "impossible trinity" into a "possible trinity". If a central bank targets an exchange rate path which is determined by uncovered interest parity (UIP), it can at the same time set its policy rate autonomously. As a UIP path removes the incentives for carry-trade, it is also compatible with capital mobility. The approach can be used unilaterally to prevent carry trade as a central bank can always prevent an appreciation of its currency. But it can also be applied bilaterally or multilaterally. Successful examples are the European Monetary System and the exchange rate policy of Slovenia before its EMU membership.

Suggested Citation

  • Peter Bofinger, 2012. "The Scope For Foreign Exchange Market Interventions," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 1-28.
  • Handle: RePEc:wsi:jicepx:v:03:y:2012:i:03:n:s1793993312500184
    DOI: 10.1142/S1793993312500184
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    References listed on IDEAS

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    1. Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," NBER Working Papers 12163, National Bureau of Economic Research, Inc.
    2. Dorrucci, Ettore & McKay, Julie, 2011. "The international monetary system after the financial crisis," Occasional Paper Series 123, European Central Bank.
    3. Agnes Benassy-Quere & Jean Pisani-Ferry, 2011. "What International Monetary System for a Fast-Changing World Economy?," Book Chapters, in: Jack T. Boorman & André Icard (ed.),Reform of the International Monetary System: The Palais Royal Initiative, edition 1, chapter 21, pages 255-298, Emerging Markets Forum.
    4. Dorrucci, Ettore & McKay, Julie, 2011. "The international monetary system after the financial crisis," Occasional Paper Series 123, European Central Bank.
    5. Michael Geiger, 2008. "Instruments Of Monetary Policy In China And Their Effectiveness: 1994–2006," UNCTAD Discussion Papers 187, United Nations Conference on Trade and Development.
    6. Plantin, Guillaume & Shin, Hyun Song, 2011. "Carry Trades, Monetary Policy and Speculative Dynamics," CEPR Discussion Papers 8224, C.E.P.R. Discussion Papers.
    7. Bordo, Michael D. & Meissner, Christopher M. & Stuckler, David, 2010. "Foreign currency debt, financial crises and economic growth: A long-run view," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 642-665, June.
    8. Carare, Alina & Stone, Mark R., 2006. "Inflation targeting regimes," European Economic Review, Elsevier, vol. 50(5), pages 1297-1315, July.
    9. Palais-Royal Initiative, 2011. "Reform of the International Monetary System: A Cooperative Approach for the Twenty-First Century," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 3(2), pages 185-193, May.
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    More about this item

    Keywords

    International monetary system; managed floating; foreign exchange market interventions; uncovered interest parity; carry trade; inflation targeting; F31; F32; F33;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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