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The Effectiveness of Foreign-Exchange Intervention: Recent Experience

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  • Maurice Obstfeld

Abstract

Since the September 1985 Plaza Hotel announcement by the Group of Five industrial countries, a substantial realignment of exchange rates has been achieved. At the same time, foreign exchange market intervention, much of it concerted and much of it sterilized, has been undertaken on a scale not seen since the early 1970s This paper takes a fresh look at the effectiveness of sterilized intervention in the light of recent experience. The paper concludes that sterilized intervention, in itself, has played an unimportant role in promoting exchange-rate realignment. Instead, clear shifts in patterns of monetary and fiscal policy appear to have been the main medium-term policy factors determining currency values. Over certain shorter time periods, intervention has influenced exchange markets through a signalling channel; but this signalling effect has been operative only as a result of authorities' frequent readiness to adjust monetary policies promptly to counteract unwelcome exchange-market pressures. The paper makes some progress in formalizing reasons why intervention might enhance the credibility of messages that governments could convey as well through simple verbal announcements.

Suggested Citation

  • Maurice Obstfeld, 1988. "The Effectiveness of Foreign-Exchange Intervention: Recent Experience," NBER Working Papers 2796, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2796
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    Cited by:

    1. Michael Bordo & Anna Schwartz, 1991. "What has foreign exchange market intervention since the Plaza Agreement accomplished?," Open Economies Review, Springer, vol. 2(1), pages 39-64, February.
    2. repec:kap:iaecre:v:17:y:2011:i:4:p:397-412 is not listed on IDEAS
    3. Barry Eichengreen., 1993. "International Monetary Arrangements for the 21st Century," Center for International and Development Economics Research (CIDER) Working Papers C93-021, University of California at Berkeley.
    4. Svensson, Lars E. O., 1992. "The foreign exchange risk premium in a target zone with devaluation risk," Journal of International Economics, Elsevier, vol. 33(1-2), pages 21-40, August.
    5. Marvin Goodfriend, 2001. "Why we need an "accord" for Federal Reserve credit policy : a note," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 23-32.
    6. Kathryn Dominguez & Jeffrey A. Frankel, 1991. "Does foreign exchange intervention matter? disentangling the portfolio and expectations effects for the mark," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    7. Shankar, Rashmi, 2002. "Distinguishing between observationally equivalent theories of crises," Policy Research Working Paper Series 2926, The World Bank.
    8. Mauricio Villamizar-Villegas & David Perez-Reyna, 2015. "A Survey on the Effects of Sterilized Foreign Exchange Intervention," BORRADORES DE ECONOMIA 012424, BANCO DE LA REPÚBLICA.
    9. Oliveira, Fernando Nascimento & Plaga, Alessandra Ribeiro, 2011. "Eficácia das intervenções do Banco Central do Brasil sobre a volatilidade da taxa de câmbio nominal," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 65(1), March.
    10. Neil, Beattie & Fillion, Jean-François, 1999. "An Intraday Analysis of the Effectiveness of Foreign Exchange Intervention," Staff Working Papers 99-4, Bank of Canada.
    11. Richard T. Baillie & William P. Osterberg, 1998. "Central bank intervention and overnight uncovered interest rate parity," Working Paper 9823, Federal Reserve Bank of Cleveland.
    12. King, Michael R, 2003. "Effective Foreign Exchange Intervention: Matching Strategies with Objectives," International Finance, Wiley Blackwell, vol. 6(2), pages 249-271, Summer.
    13. Baillie, Richard T. & Osterberg, William P., 2000. "Deviations from daily uncovered interest rate parity and the role of intervention," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 363-379, December.
    14. Patrick Artus & Éric Bleuze & François Lecointe, 1990. "Peut-on expliquer les mouvements du dollar ?," Revue Économique, Programme National Persée, vol. 41(6), pages 1027-1050.
    15. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
    16. Joon-Hwan Im, 2001. "Optimal Currency Target Zones: How Wide Should Exchange Rate Bands Be?," International Economic Journal, Taylor & Francis Journals, vol. 15(1), pages 61-93.
    17. Michael D. Bordo & Anna J. Schwartz, 1990. "What has Foreign Market Intervention Since the Plaza Agreement Accomplished?," NBER Working Papers 3562, National Bureau of Economic Research, Inc.

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