Does Foreign Exchange Intervention Work?

By: Kathryn Dominguez, Jeffrey Frankel

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Paperback | 1 November 1993 | Edition Number 1

At a Glance

Paperback
192 Pages

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22+

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22.95 x 15.48 x 1.0

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How much impact on exchange rates do central banks have when they buy and sell currencies? According to many analysts, such intervention has no independent impact. This book challenges the conventional wisdom, demonstrating that such intervention can be an effective and extremely important tool for policymakers. Using previously unavailable daily intervention data from the US Federal Reserve and German Bundesbank, the authors show that even "sterilized" intervention -intervention that entails no corresponding changes in monetary policy- has a significant effect. A key element is whether the intervention is known to the public: widespread market awareness of the activity adds substantially to its payoff. Authors Dominguez and Frankel draw implications for intervention policy and its role in international economic policy coordination.

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Preface	p. vii
Acknowledgments	p. xi
Introduction: New Data to Consider an Old Question	p. 1
A Brief History of Intervention Since 1973	p. 5
The Start of the Floating-Rate Era	p. 5
The Late 1970s: Talking Down, and then Rescuing, the Dollar	p. 6
The First Reagan Administration (1981-84)	p. 7
Managing the Dollar (1985-91)	p. 11
Does a Free-Floating System Work Well?	p. 29
Arguments over Free-Floating Exchange Rates	p. 29
Real Effects of Exchange Rate Volatility	p. 31
Have Exchange Rates Behaved as They Were Supposed To?	p. 35
Chartists and Fundamentalists	p. 41
Policy Issues	p. 45
Is an Independent Policy Tool Needed?	p. 45
How Foreign Exchange Intervention Policy Is Made	p. 48
Intervention Categorized and Defined	p. 55
Sterilized Versus Nonsterilized Intervention	p. 55
Implications of Current Asset Supply Changes for Expectations	p. 59
Public Versus Secret Intervention	p. 59
Concerted Versus Unilateral Intervention	p. 62
Leaning Against the Wind Versus With The Wind	p. 63
Transactions Undertaken by the Central Bank for Customers	p. 64
Transactions by Other Government Funds and Agencies	p. 65
Foreign- and Domestic-Currency Assets Sold by Other Countries	p. 66
Other Technical Issues of Definition	p. 66
The Data on Intervention	p. 69
Available, Unavailable, and Newly Available	p. 69
Do Market Participants Know When Central Banks Intervene?	p. 72
When and Why Has the US Intervened?	p. 74
When and Why Have Other Major Countries Intervened?	p. 82
The Tendency to Sterilize	p. 87
The Scale of Intervention	p. 88
The Relationship between Intervention and Exchange Rates	p. 89
Assessing Intervention's Effectiveness	p. 103
Estimating Effects of Asset Supplies on the Exchange Rate	p. 103
Estimating Effects of Intervention on the Risk Premium	p. 105
Other Approaches	p. 106
Estimating How Expectations Are Formed	p. 109
Intervention in the 1980s: The Results	p. 111
The Effect of News	p. 111
Estimation of the Risk Premium Effect	p. 127
A Quantitative Summary of the Estimated Effects	p. 131
Implications for Policy	p. 135
References	p. 141
Exchange Rate Policy News Reports, by Date and Source, 1983-9	p. 149
Index	p. 165
Table of Contents provided by Syndetics. All Rights Reserved.

Does Foreign Exchange Intervention Work?

At a Glance

Paperback

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