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Foreign exchange market intervention in emerging markets: motives, techniques and implications

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Disciplines
  • Economics

Abstract

Foreign exchange market intervention in emerging markets: motives, techniques and implications - BIS Paper No 24, part 2 May 2005 4 BIS Papers No 24 Motives for intervention Ramon Moreno1 I. Introduction Central banks intervene in foreign exchange markets in order to achieve a variety of overall economic objectives, such as controlling inflation, maintaining competitiveness or maintaining financial stability. The precise objectives of policy and how they are reflected in foreign exchange market intervention depend on a number of factors, including the stage of a country’s development, the degree of financial market development and integration, and a country’s overall vulnerability to shocks. The precise definition of which operations in forex markets constitute “intervention” has also been a matter of controversy.2 Three immediate objectives of intervention have been important: to influence the level of the exchange rate; to dampen exchange rate volatility or supply liquidity to foreign exchange markets; and to influence the amount of foreign reserves. Much of the analysis in this paper draws on central bank responses to a questionnaire on foreign exchange market intervention and meetings with central bank officials and foreign exchange market participants. II. Motives for intervention Table 1 proposes a taxonomy of intervention that will be used to organise the discussion. Foreign exchange market intervention is driven by broad macroeconomic objectives shown in the column headers: to control inflation or maintain internal balance; to maintain external balance and prevent resource misallocation or preserve competitiveness and boost growth; and to prevent or deal with disorderly markets or crises. To achieve these objectives, central banks might seek to target the level of the exchange rate, dampen exchange rate volatility or influence the amount of foreign reserves. The economic objectives of intervention will influence its targets, the indicators

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