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Official Intervention in the Foreign Exchange Market; Elements of Best Practice

  • Jorge Iván Canales Kriljenko
  • Cem Karacadag
  • Roberto Pereira Guimarães
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    This paper offers guidance on the operational aspects of official intervention in the foreign exchange market, particularly in developing countries with flexible exchange rate regimes. A brief survey of the literature and country experience is followed by an analysis of the objectives, timing, amount, degree of transparency, and choice of markets and counterparties in conducting intervention. The analysis highlights the difficulty of detecting exchange rate misalignments and disorderly markets, and argues in favor of parsimony in official intervention. Determining the timing and amount of intervention is a highly subjective excercise, and some degree of discretion is almost necessary, though policy rules may serve as "rules of thumb."

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=16787
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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/152.

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    Length: 41
    Date of creation: 01 Jul 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/152
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    1. Donal Bredin & Stilianos Fountas & Eithne Murphy, 1998. "An Empirical Analysis of Short-Run and Long-Run Irish Export Functions: Does Exchange Rate Volatility Matter?," Working Papers 22, National University of Ireland Galway, Department of Economics, revised 1998.
    2. Martin D.D. Evans & Richard K. Lyons, 1999. "Order Flow and Exchange Rate Dynamics," NBER Working Papers 7317, National Bureau of Economic Research, Inc.
    3. Sarno, Lucio & Taylor, Mark P, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?," CEPR Discussion Papers 2690, C.E.P.R. Discussion Papers.
    4. Takatoshi Ito, 2002. "Is Foreign Exchange Intervention Effective?: The Japanese Experiences in the 1990s," NBER Working Papers 8914, National Bureau of Economic Research, Inc.
    5. Guy Meredith & Menzie D. Chinn, 1998. "Long-Horizon Uncovered Interest Rate Parity," NBER Working Papers 6797, National Bureau of Economic Research, Inc.
    6. Geraats, P.M., 2001. "Why Adopt Transparency? The Publication of Central Bank Forecasts," Papers 41, Quebec a Montreal - Recherche en gestion.
    7. Dominguez & K., 1997. "The Market Microstructure of Central Bank Intervention," Working Papers 412, Research Seminar in International Economics, University of Michigan.
    8. William H. Branson & Jacob A. Frenkel & Morris Goldstein, 1990. "International Policy Coordination and Exchange Rate Fluctuations," NBER Books, National Bureau of Economic Research, Inc, number bran90-1.
    9. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
    10. Hung, Juann H, 1997. "Intervention strategies and exchange rate volatility: a noise trading perspective," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 779-793, September.
    11. Chinn, Menzie D., 2000. "Before the fall: were East Asian currencies overvalued?," Emerging Markets Review, Elsevier, vol. 1(2), pages 101-126, September.
    12. Don E. Roper & Stephen J. Turnovsky, 1980. "Optimal Exchange Market Intervention in a Simple Stochastic Macro Model," Canadian Journal of Economics, Canadian Economics Association, vol. 13(2), pages 296-309, May.
    13. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies; How High Liquidity Can offset Weak Fundamentals and the Effects of Contagion," IMF Working Papers 99/88, International Monetary Fund.
    14. Ilker Domac & Alfonso Mendoza, 2002. "Is there Room for Forex Interventions under Inflation Targeting Framework? Evidence from Mexico and Turkey," Discussion Papers 0206, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    15. Leonardo Bartolini, 2002. "Foreign exchange swaps," New England Economic Review, Federal Reserve Bank of Boston, issue Q 2, pages 11-12.
    16. Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-10.
    17. Zapatero, Fernando & Reverter, Luis F., 2003. "Exchange rate intervention with options," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 289-306, April.
    18. repec:imf:imfwpa:01/43 is not listed on IDEAS
    19. Ramon Moreno, 1997. "Lessons from Thailand," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov7.
    20. Catharina J. Hooyman, 1994. "The Use of Foreign Exchange Swaps by Central Banks," IMF Staff Papers, Palgrave Macmillan, vol. 41(1), pages 149-162, March.
    21. Roberto Perrelli & Christian B. Mulder, 2001. "Foreign Currency Credit Ratings for Emerging Market Economies," IMF Working Papers 01/191, International Monetary Fund.
    22. Jones, Michael, 1984. "Optimal Foreign Exchange Market Intervention: Evidence from the Bretton Woods Era," The Review of Economics and Statistics, MIT Press, vol. 66(2), pages 242-55, May.
    23. Turnovsky, Stephen J. & Grinols, Earl, 1996. "Optimal government finance policy and exchange rate management in a stochastically growing open economy," Journal of International Money and Finance, Elsevier, vol. 15(5), pages 687-716, October.
    24. repec:imf:imfwpa:97/164 is not listed on IDEAS
    25. G. Russell Kincaid & Martin Fetherston & Peter Isard & Hamid Faruqee, 2001. "Methodology for Current Account and Exchange Rate Assessments," IMF Occasional Papers 209, International Monetary Fund.
    26. Jorion, Philippe, 1995. " Predicting Volatility in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 50(2), pages 507-28, June.
    27. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-55, December.
    28. Evan Tanner, 1998. "Deviations From Uncovered Interest Parity; A Global Guide to Where the Action is," IMF Working Papers 98/117, International Monetary Fund.
    29. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    30. Ramana Ramaswamy & Hossein Samiei, 2000. "The Yen-Dollar Rate: Have Interventions Mattered?," IMF Working Papers 00/95, International Monetary Fund.
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