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Foreign exchange intervention: strategies and effectiveness

Author

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  • Nuttathum Chutasripanich
  • James Yetman

Abstract

Foreign exchange intervention has been actively used as a policy tool in many economies in Asia and elsewhere. In this paper, we examine two intervention rules (leaning against exchange rate misalignment and leaning against the wind), utilised with varying degrees of transparency, based on a simple model with three kinds of agents: fundamentalists, speculators and the central bank. We assess the effectiveness of these rules against five criteria: stabilising the exchange rate, reducing current account imbalances, discouraging speculation, minimising reserves volatility and limiting intervention costs. Overall we find no dominant intervention strategy. Intervention that reduces exchange rate volatility, for example, also reduces the risks of speculation, creating a feedback loop and potentially leading to high levels of speculation, reserves volatility and intervention costs. These intervention costs will be especially large when exchange rate movements are driven by interest rate shocks, although some degree of opaqueness can help to reduce them. Survey evidence from BIS (2005, 2013) indicates that central banks follow a range of different strategies when intervening in foreign exchange rates. Given the trade-offs that different strategies entail in our model, this is not surprising.

Suggested Citation

  • Nuttathum Chutasripanich & James Yetman, 2015. "Foreign exchange intervention: strategies and effectiveness," BIS Working Papers 499, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:499
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    References listed on IDEAS

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    Cited by:

    1. repec:hrs:journl:v:ix:y:2017:i:2:p:55-68 is not listed on IDEAS
    2. Roberto Chang, 2018. "Foreign Exchange Intervention Redux," NBER Working Papers 24463, National Bureau of Economic Research, Inc.
    3. X. Fernández, Bernardo & Fernández Q., Vladimir & Aldazosa, E. Rene, 2017. "Una Subasta Doble de Divisas para la Determinación del Tipo de Cambio en Bolivia," Documentos de trabajo 4/2017, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana.
    4. repec:bis:bisbpc:96-06 is not listed on IDEAS

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    Keywords

    foreign exchange intervention; exchange rates; speculation;

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