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The Effectiveness of Foreign-Exchange Intervention: Recent Experience

  • Maurice Obstfeld

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2796.

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Date of creation: Dec 1988
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Publication status: published as Branson, William H., Jacob A. Frenkel, and Morris Goldstein (eds.) International Policy Coordination and Exchange Rate Fluctuations. Chicago: The University of Chicago Press, 1990.
Handle: RePEc:nbr:nberwo:2796
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