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Title: Exchange Rate Volatility and Intervention: Implications of the Theory of Optimum Currency Areas

Author(s): Tamim Bayoumi and Barry Eichengreen

Publication Date: September 1998

Keyword(s): Exchange Rate Volatility, Intervention and Optimum Currency Areas

Programme Area(s): International Macroeconomics

Abstract: We show that the variables pointed to by the theory of optimum currency areas (OCAs) help to explain patterns of exchange rate variability and intervention across countries. But OCA considerations affect exchange market pressures and intervention in different ways. Exchange market pressures mainly reflect asymmetric shocks, while intervention largely reflects the variables that OCA theory suggests cause countries to value stable exchange rates (small size and the extent of trade links). Intervention and exchange market pressure also vary with the structure of the international monetary system.

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Bibliographic Reference

Bayoumi, T and Eichengreen, B. 1998. 'Exchange Rate Volatility and Intervention: Implications of the Theory of Optimum Currency Areas'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1982