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

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  • Economics

Abstract

Foreign exchange market intervention in emerging markets: motives, techniques and implications - BIS Papers 24, part 26 May 2005 292 BIS Papers No 24 Foreign exchange intervention in Venezuela Iván Giner and Omar Mendoza Introduction1 In the last eight years, different exchange rate regimes have been applied in Venezuela: crawling band (1996-2001), free floating (2002) and, since January 2003, capital controls with a fixed exchange rate. After the disruption of oil activity in December 2002, capital controls were implemented to prevent the depletion of international reserves. Under the current system, an administrative office (Comisión de Administración de Divisas: CADIVI) is in charge of regulating and managing the use of foreign currency. The Central Bank of Venezuela (BCV) fixes a monthly allocation of foreign currency to be administered by CADIVI, purchases foreign currency from residents, and sells foreign currency to the public and private sectors subject to approval from CADIVI. Thus, there is not much scope for central bank interventions in the foreign exchange market in Venezuela with the current regime. However, we might refer to the intervention mechanisms that were applied during the currency band and the floating regimes that preceded capital controls. In this context, this note is organised as follows: Section 1 mentions the rationale of central bank intervention in the forex market; Section 2 refers briefly to the experience during the currency band system; Section 3 focuses on the intervention during the float, and Section 4 presents some concluding remarks. 1. The rationale of central bank intervention in the forex market Venezuelan law establishes that PDVSA, the state oil enterprise, must sell its oil export revenues to the central bank. These revenues constitute the main source of foreign currency in Venezuela. On the other hand, the private sector is characterised by demanding more foreign currency for imports than those generated

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