DP1982 Exchange Rate Volatility and Intervention: Implications of the Theory of Optimum Currency Areas

Author(s): Tamim Bayoumi, Barry Eichengreen
Publication Date: September 1998
Keyword(s): Exchange Rate Volatility, Intervention, Optimum Currency Areas
JEL(s): F31, F36
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1982

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.