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 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.

Bibliographic Details

Main Authors:	Basu, Kaushik, Varoudakis, Aristomene
Language:	English en_US
Published:	World Bank, Washington, DC 2013-05
Subjects:	ACCUMULATION OF RESERVES, ADVANCED ECONOMIES, ADVANCED ECONOMY, ARBITRAGE, ASSET POSITIONS, ASSETS, AUCTION, AUCTION AMOUNTS, AUCTIONS, BANK POLICY, BONDS, BROKERS, BUFFERS, CALL OPTIONS, CAPITAL ACCOUNT, CAPITAL FLOW, CAPITAL FLOWS, CAPITAL INFLOWS, CAPITAL OUTFLOWS, CENTRAL BANK, CENTRAL BANK POLICY, CENTRAL BANKS, COMMODITY, COMPETITIVE MARKET, CONSUMERS, CRAWLING PEG, CREDIBILITY, CREDIT GROWTH, CURRENCY BASKETS, CURRENCY CONVERTIBILITY, CURRENCY CRISES, CURRENCY DEPRECIATION, CURRENCY MARKETS, CURRENCY SWAPS, CURRENT ACCOUNT, CURRENT ACCOUNT SURPLUSES, DEBT, DEBT CRISIS, DEBT REPAYMENT, DEBT SERVICING, DEFLATION, DEMAND CURVE, DEPRECIATIONS, DEVALUATION, DEVELOPING COUNTRIES, DEVELOPMENT ECONOMICS, DEVELOPMENT POLICY, DOLLAR EXCHANGE RATE, DOMESTIC CREDIT, DOMESTIC CREDIT GROWTH, DOMESTIC CURRENCY, DOMESTIC LIQUIDITY, ECONOMIC CRISIS, ECONOMIC OUTLOOK, ECONOMIC POLICY, EFFECTIVE EXCHANGE RATE, EMERGING ECONOMIES, EMERGING MARKET, EMERGING MARKET ECONOMIES, EMERGING MARKETS, EQUILIBRIUM, EXCESS DEMAND, EXCHANGE RATE, EXCHANGE RATE APPRECIATION, EXCHANGE RATE FLUCTUATIONS, EXCHANGE RATE LEVEL, EXCHANGE RATE LEVELS, EXCHANGE RATE MANAGEMENT, EXCHANGE RATE MISALIGNMENT, EXCHANGE RATE MOVEMENTS, EXCHANGE RATE OVERVALUATION, EXCHANGE RATE PEGS, EXCHANGE RATE POLICIES, EXCHANGE RATE REGIME, EXCHANGE RATE REGIMES, EXCHANGE RATE STABILITY, EXCHANGE RATE VOLATILITY, EXCHANGE-RATE, EXPECTED RETURN, EXPORT EARNINGS, EXPOSURE, EXTERNAL COMPETITIVENESS, EXTERNAL DEBT, FEDERAL RESERVE, FEDERAL RESERVE BANK, FINANCIAL CRISIS, FINANCIAL INSTITUTIONS, FINANCIAL MARKET, FINANCIAL STABILITY, FINANCIAL STRESS, FLEXIBLE EXCHANGE RATE, FLEXIBLE EXCHANGE RATES, FLOATING EXCHANGE RATE, FLOATING EXCHANGE RATE REGIME, FLOATING EXCHANGE RATES, FOREIGN CURRENCY, FOREIGN CURRENCY BORROWING, FOREIGN EXCHANGE, FOREIGN EXCHANGE MARKET, FOREIGN EXCHANGE MARKET INTERVENTION, FOREIGN EXCHANGE MARKETS, FOREIGN EXCHANGE RESERVE, FOREIGN EXCHANGE RESERVES, FOREIGN TRADE, FORWARD MARKET, FORWARD MARKETS, GDP, GOLD, GOVERNMENT BONDS, HOLDING, HOLDINGS, IMPERFECT COMPETITION, INCOME, INCOME FLOWS, INFLATION, INFLATION RATE, INFLATION TARGET, INFLATION TARGETING, INFLATION TARGETS, INSTRUMENT, INSURANCE, INSURANCE COMPANIES, INTEREST PARITY, INTEREST RATE, INTERNATIONAL BANK, INTERNATIONAL CREDIT, INTERNATIONAL MARKET, INTERNATIONAL RESERVES, INTERNATIONAL SETTLEMENTS, INVESTING, INVESTMENT PERIOD, LIQUIDITY, MARKET CONDITIONS, MARKET CONFIDENCE, MARKET CONTAGION, MARKET EXCHANGE RATE, MARKET MICROSTRUCTURE, MARKET PARTICIPANTS, MARKET VALUES, MICROSTRUCTURE, MONETARY AUTHORITIES, MONETARY POLICIES, MONETARY POLICY, MONETARY POLICY FRAMEWORK, MONEY MARKET, MONEY SUPPLY, NASH EQUILIBRIUM, NET CAPITAL, NOMINAL ANCHORS, NOMINAL EXCHANGE RATE, OIL EXPORTS, OLIGOPOLY, OPPORTUNITY COST, OPPORTUNITY COSTS, OTHER CURRENCIES, OUTSTANDING STOCK, PAYMENT OF INTEREST, PEG, PEGS, PENSION, PENSION FUND, PORTFOLIO, POST-CRISIS PERIOD, PRICE INCREASES, PRIMARY COMMODITY, PRODUCT MARKETS, PUBLIC DEBT, PUT OPTIONS, REAL ESTATE, RELATIVE EXCHANGE RATE, REPO, REPO WINDOW, REPOS, RESERVE, RESERVE ACCUMULATION, RESERVE BANK, RESERVE CHANGES, RESERVE CURRENCIES, RESERVE HOLDING, RESERVE HOLDINGS, RETURN, RETURNS, SHORT-TERM CAPITAL, SHORT-TERM INTEREST RATES, SPECULATIVE ATTACKS, SPEED OF ADJUSTMENT, SPOT EXCHANGE RATE, SPOT MARKET, STANDARD DEVIATION, SUPPLY CURVE, SUPPLY CURVES, SUPPLY OF CREDIT, SWAPS, TRANSACTION, UNCERTAINTY, UNDERVALUATION, VALUATION, VOLATILE CAPITAL, VOLATILITY, VOLATILITY OF CAPITAL, WEALTH, WORLD ECONOMY, ZERO INTEREST RATE,
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 https://hdl.handle.net/10986/15551
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