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The Mechanics of Central Bank Intervention in Foreign Exchange Markets

Author

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  • Basu, Kaushik

    (Cornell University)

Abstract

Central banks in developing countries, wanting to devalue the domestic currency, usually intervene in the foreign exchange market by buying up foreign currency using domestic money--often backing this up with sterilization to counter inflationary pressures. Such interventions are usually effective in devaluing the currency but lead to a build up of foreign exchange reserves beyond what the central bank may need. The present paper analyzes the 'mechanics' of such central bank interventions and, using techniques of industrial organization theory, proposes new kinds of interventions which have the same desired effect on the exchange rate, without causing a build up of reserves.

Suggested Citation

  • Basu, Kaushik, 2009. "The Mechanics of Central Bank Intervention in Foreign Exchange Markets," Working Papers 09-02, Cornell University, Center for Analytic Economics.
  • Handle: RePEc:ecl:corcae:09-02
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    File URL: https://cae.economics.cornell.edu/09-02.pdf
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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship

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