Is intervention effective after all

Abstract

This study examines the effectiveness of direct official intervention in terms of whether the intervention by the Central Bank in the foreign-exchange market does offer effective or lasting instruments for exchange rates. The study is confirmatory research since it offers a descriptive survey of the impact of the Central Bank’s intervention on exchange rates across several economies. The paper makes key contributions to the existing literature by reviewing the past records of intervention in advanced and emerging market economies in different countries, and in doing so, it provides empirical evidence as support. The main findings reveal that the Central Bank’s intervention is rather effective. However, in most cases, monetary authorities try to intervene less and less as they believe in the use of market mechanism as the determinant for exchange rates. Even though the strongest intervention on money markets was made in developed countries through money expansion, only in some countries where the financial markets are thin and small is there the need for more frequent intervention. It can be concluded that the Central Bank’s intervention aim to calm the disorderly market and smooth out volatility. The effect of intervention is more promising both when it is accompanied by monetary policies and when it is coordinated. Key words: Intervention, effectiveness, foreign exchange rates.