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
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 de...
| Main Authors: | , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2013/05/17751131/move-exchange-rate-must-diverse-practice-foreign-exchange-intervention-central-banks-proposal-doing-better http://hdl.handle.net/10986/15551 |
| 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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