Discussion paper

DP3758 Is Official Exchange Rate Intervention Effective?

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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Citation

Taylor, M (2003), ‘DP3758 Is Official Exchange Rate Intervention Effective?‘, CEPR Discussion Paper No. 3758. CEPR Press, Paris & London. https://cepr.org/publications/dp3758