When Is Foreign Exchange Intervention Effective? Evidence from 33 Countries

Abstract

This paper examines foreign exchange intervention based on novel daily data covering 33 countries from 1995 to 2011. We find that intervention is widely used and an effective policy tool, with a success rate in excess of 80 percent under some criteria. The policy works well in terms of smoothing the path of exchange rates, and in stabilizing the exchange rate in countries with narrow band regimes. Moving the level of the exchange rate in flexible regimes requires that some conditions are met, including the use of large volumes and that intervention is made public and supported via communication. (JEL E52, E58, F31, F33, O19, O24)

International Capital Flow Pressures

“…Indeed, the use of policy tools in response to exchange market pressures is pervasive, especially in emerging markets, but also in some advanced economies (Ghosh, Ostry and Qureshi, 2018). Despite earlier literature with more mixed conclusions, recent evidence points to foreign exchange intervention with a high success rate under some criteria (Fratzscher, Gloede, Menkhoff, Sarno and Stohr, 2019). Accordingly, empirical studies that use cross-country data on realized capital flows or exchange rate changes to inform the range of key questions in international finance cannot just absorb these considerations in controls like country fixed effects.…”

External shocks, financial volatility and reserve requirements in an open economy

“…See for instancePalma and Portugal (2014) for evidence on exchange rate smoothing for Brazil, andVujanovic (2011) andFratzscher et al (2015) for cross-country evidence.11 We also experimented with the expected depreciation rate, E   +1   , in (46). The results were essentially the same.12 This is complete sterilization in a broad sense-as opposed to a narrow sense where the supply of cash remains constant.…”

Is Foreign Exchange Intervention a Panacea in Diversified Circumstances? The Perspectives of Asymmetric Effects

“…However, the total expenses show no significant difference. [24] conduct empirical analysis with an extensive panel dataset, suggesting that intervention is lucrative for advanced economies, while EMEs have to take into consideration affordability before intervention.…”