Does foreign exchange intervention work? / Kathryn M. Dominguez, Jeffrey A. Frankel.

Format:

Book

Author/Creator:

Dominguez, Kathryn M.

Contributor:

Frankel, Jeffrey A.

Language:

English

Subjects (All):

Foreign exchange administration--United States.

Foreign exchange administration--Germany.

Monetary policy--United States.

Monetary policy.

Foreign exchange administration.

United States.

Germany.

Physical Description:

xii, 170 pages : illustrations ; 23 cm

Place of Publication:

Washington, DC : Institute for International Economics, 1993.

Summary:

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 the 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.

Contents:

Introduction: New Data to Consider an Old Question 1

1 A Brief History of Intervention Since 1973 5

The Start of the Floating-Rate Era 5

The Late 1970s: Talking Down, and then Rescuing, the Dollar 6

The First Reagan Administration (1981-84) 7

Managing the Dollar (1985-91) 11

2 Does a Free-Floating System Work Well? 29

Arguments over Free-Floating Exchange Rates 29

Real Effects of Exchange Rate Volatility 31

Have Exchange Rates Behaved as They Were Supposed To? 35

Chartists and Fundamentalists 41

3 Policy Issues 45

Is an Independent Policy Tool Needed? 45

How Foreign Exchange Intervention Policy Is Made 48

4 Intervention Categorized and Defined 55

Sterilized Versus Nonsterilized Intervention 55

Implications of Current Asset Supply Changes for Expectations 59

Public Versus Secret Intervention 59

Concerted Versus Unilateral Intervention 62

Leaning Against the Wind Versus With The Wind 63

Transactions Undertaken by the Central Bank for Customers 64

Transactions by Other Government Funds and Agencies 65

Foreign- and Domestic-Currency Assets Sold by Other Countries 66

Other Technical Issues of Definition 66

5 The Data on Intervention 69

Available, Unavailable, and Newly Available 69

Do Market Participants Know When Central Banks Intervene? 72

When and Why Has the US Intervened? 74

When and Why Have Other Major Countries Intervened? 82

The Tendency to Sterilize 87

The Scale of Intervention 88

The Relationship between Intervention and Exchange Rates 89

6 Assessing Intervention's Effectiveness 103

Estimating Effects of Asset Supplies on the Exchange Rate 103

Estimating Effects of Intervention on the Risk Premium 105

Estimating How Expectations Are Formed 109

7 Intervention in the 1980s: The Results 111

The Effect of News 111

Estimation of the Risk Premium Effect 127

A Quantitative Summary of the Estimated Effects 131

8 Implications for Policy 135

Appendix Exchange Rate Policy News Reports, by Date and Source, 1983-9 149.

Notes:

"September 1993."

Includes bibliographical references (pages 141-147) and index.

ISBN:

0881321044

OCLC:

27430868