Working Paper: NBER ID: w2796
Authors: Maurice Obstfeld
Abstract: 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.
Keywords: foreign exchange intervention; sterilized intervention; exchange rates; monetary policy; fiscal policy
JEL Codes: F31; F33; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shifts in monetary and fiscal policy (E63) | currency values (F31) |
| sterilized intervention (C90) | currency values (F31) |
| sterilized intervention (C90) | market expectations and behavior (G41) |
| market expectations and behavior (D84) | exchange rate movements (F31) |
| historical precedents (B15) | current policy effectiveness (F68) |