Intervention in the Foreign Exchange Market: Rationale, Effectiveness, Costs and Benefits

Pilbeam, K., Bris, A., Alcidi, C., Barslund, M., Pieter de Groen, W. & Gros, D. (2015). Intervention in the Foreign Exchange Market: Rationale, Effectiveness, Costs and Benefits. Intereconomics: review of European economic policy, 50(2), pp. 64-81. doi: 10.1007/s10272-015-0528-0

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Abstract

This paper reviews the underlying rationale for intervention in the foreign exchange market and argues that intervention can at times be justified due to the market producing the “wrong rate”, to mitigate the effects of exchange rate overshooting and also to slow down the process of economic adjustment. However, in order to be effective foreign exchange market intervention needs to be of the non-sterilized variety, that is, affect the domestic money supply and short term interest rate. Unfortunately, as the case of the Peoples Bank of China and the recent case of the Swiss National Bank’s attempts to stem the appreciation of their currencies, the side effects have shown the rapid expansion of their money supplies and low interest rates have had imposed significant costs on their economies. The result is that the Cemtral Bank has to continually monitor the costs and benefits of their foreign exchange interventions and be prepared consider a return to floating when the costs become too high.

Item Type: Article
Additional Information: The final publication is available at Springer via http://dx.doi.org/10.1007/s10272-015-0528-0
Subjects: H Social Sciences > HB Economic Theory
Divisions: School of Social Sciences > Department of Economics
URI: http://openaccess.city.ac.uk/id/eprint/8481

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