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How to Move the Exchange Rate If You Must : The Diverse Practice of Foreign Exchange Intervention by Central Banks and a Proposal for Doing it Better / Kaushik Basu
World Bank Open Knowledge Repository (formerly "World Bank E-Library Publications") Available online
View online- Format:
- Book
- Government document
- Author/Creator:
- Basu, Kaushik
- Series:
- Policy research working papers.
- World Bank e-Library.
- Language:
- English
- Subjects (All):
- Central bank policy.
- Foreign exchange intervention.
- Intervention rules.
- Macroeconomics and Economic Growth.
- Oligopoly.
- Local Subjects:
- Central bank policy.
- Foreign exchange intervention.
- Intervention rules.
- Macroeconomics and Economic Growth.
- Oligopoly.
- Physical Description:
- 1 online resource (27 pages)
- Other Title:
- How to Move the Exchange Rate If You Must
- Place of Publication:
- Washington, D.C., The World Bank, 2013
- System Details:
- data file
- Summary:
- The paper is about the art of exchange rate management by central banks. It begins by reviewing the diversity of objectives and practices of central bank intervention in the foreign exchange market. Central banks typically exercise discretion in determining when and to what extent to intervene. Some central banks use publicly declared rules of intervention, with the aim of increasing visibility and strengthening the signaling channel of policy. There is tentative evidence that the volatility of foreign exchange reserves is comparatively lower in emerging market economies where central banks follow some form of rules-based foreign exchange intervention. The paper goes on to argue that when the foreign exchange market includes some large strategic participants, the central bank can achieve superior outcomes if intervention takes the form of a rule, or "schedule," indicating commitments to buying and selling different quantities of foreign currency conditional on the exchange rate. Exchange rate management and reserve management can then be treated as two independent objectives by the central bank. In line with the stylized facts reviewed, this would enable a central bank to pursue exchange rate objectives with minimum reserve changes, or achieve reserve targets with minimum impact on the exchange rate.
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