The Effectiveness of Foreign-Exchange Intervention: Recent Experience

Maurice Obstfeld

NBER Working Paper No. 2796 (Also Reprint No. r1525)
Issued in February 1991
NBER Program(s):   ITI   IFM

Since the September 1985 Plaza Hotel announcement by the Group of Five industrial countries, a substantial realignment of exchange rates has been achieved. At the same time, foreign exchange market intervention, much of it concerted and much of it sterilized, has been undertaken on a scale not seen since the early 1970s This paper takes a fresh look at the effectiveness of sterilized intervention in the light of recent experience. The paper concludes that sterilized intervention, in itself, has played an unimportant role in promoting exchange-rate realignment. Instead, clear shifts in patterns of monetary and fiscal policy appear to have been the main medium-term policy factors determining currency values. Over certain shorter time periods, intervention has influenced exchange markets through a signalling channel; but this signalling effect has been operative only as a result of authorities' frequent readiness to adjust monetary policies promptly to counteract unwelcome exchange-market pressures. The paper makes some progress in formalizing reasons why intervention might enhance the credibility of messages that governments could convey as well through simple verbal announcements.

(1934 K)

(715 K)

Published:

• Branson, William H., Jacob A. Frenkel, and Morris Goldstein (eds.) International Policy Coordination and Exchange Rate Fluctuations. Chicago: The University of Chicago Press, 1990. ,
• The Effectiveness of Foreign-Exchange Intervention: Recent Experience, 1985- 1988 , Maurice Obstfeld, in International Policy Coordination and Exchange Rate Fluctuations (1990), University of Chicago Press
  

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