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Is Official Exchange Rate Intervention Effective?

Listed author(s):
  • Taylor, Mark P

I examine the effectiveness of exchange rate intervention within the context of a Markov-switching model for the real exchange rate. The probability of switching between stable and unstable regimes depends non-linearly upon the amount of intervention, the degree of misalignment and the duration of the regime. Applying this to dollar-mark data for the period 1985-98, I find that intervention increases the probability of stability when the rate is misaligned, and that its influence grows with the degree of misalignment. Intervention within a small neighbourhood of equilibrium will result in a greater probability of instability.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3758.

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Date of creation: Feb 2003
Handle: RePEc:cpr:ceprdp:3758
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