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Discussion Paper Details

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Title: Is Official Exchange Rate Intervention Effective?

Author(s): Mark P Taylor

Publication Date: February 2003

Keyword(s): mean reversion, non-linearity, official intervention and real exchange rate

Programme Area(s): International Macroeconomics

Abstract: I examine the effectiveness of exchange rate intervention within the context of a Markov-switching model for the real exchange rate. The probability of switching between stable and unstable regimes depends non-linearly upon the amount of intervention, the degree of misalignment and the duration of the regime. Applying this to dollar-mark data for the period 1985-98, I find that intervention increases the probability of stability when the rate is misaligned, and that its influence grows with the degree of misalignment. Intervention within a small neighbourhood of equilibrium will result in a greater probability of instability.

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Bibliographic Reference

Taylor, M. 2003. 'Is Official Exchange Rate Intervention Effective?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3758