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Is Official Exchange Rate Intervention Effective?

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  • Taylor, Mark P

Abstract

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.

Suggested Citation

  • Taylor, Mark P, 2003. "Is Official Exchange Rate Intervention Effective?," CEPR Discussion Papers 3758, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3758
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    More about this item

    Keywords

    mean reversion; non-linearity; official intervention; real exchange rate;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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