Official Intervention in the Foreign Exchange Market: Elements of Best Practice

IMF Working Papers, July 1, 2003

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Official Intervention in the Foreign Exchange Market: Elements of Best Practice

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Bibliographic details

• Authors: Jorge I Canales Kriljenko, Cem Karacadag, Roberto Guimarães-Filho
• Published: July 1, 2003
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451857115.001

Overview and Purpose

• Offers guidance on the operational aspects of official intervention in the foreign exchange market, particularly in developing countries with flexible exchange rate regimes.
• Presents a brief survey of the literature and country experience, followed by analysis focused on operational choices.

Major analytical themes

• Objectives of intervention
  • Examines objectives policymakers may pursue when intervening in foreign exchange markets.
• Timing and amount of intervention
  • Emphasizes that determining timing and amount is a highly subjective exercise.
  • Notes that some degree of discretion is almost necessary.
  • Suggests that policy rules may serve as "rules of thumb."
• Degree of transparency
  • Considers how transparent authorities should be when conducting interventions.
• Choice of markets and counterparties
  • Analyzes selection of markets and counterparties used for intervention operations.
• Detection challenges and market assessment
  • Highlights the difficulty of detecting exchange rate misalignments and disorderly markets.
  • Argues in favor of parsimony in official intervention in light of these detection challenges.

Key findings and propositions

• Parsimony in intervention
  • Because exchange rate misalignments and disorderly market conditions are difficult to detect, the analysis argues for parsimony in official intervention.
• Discretion versus rules
  • While discretion is almost necessary for timing and amount decisions, policy rules can provide useful "rules of thumb" to guide interventions.
• Operational focus
  • The paper centers on operational aspects (objectives, timing, amount, transparency, market/counterparty choice) rather than on broader macroeconomic frameworks.

Subjects and keywords (as listed)

• Subjects: Banking, Currencies, Currency markets, Exchange rates, Financial markets, Foreign exchange, Foreign exchange intervention, Money
• Keywords: Africa, Currencies, Currency markets, exchange rate policy, Exchange rates, foreign currency, foreign exchange intervention, foreign exchange market, forward market, Global, intervention objective, intervention policy, market condition, market participant, option market intervention, order flow, policy signal, price impact, WP

Content in this bundle

• Official Intervention in the Foreign Exchange Market: Elements of Best Practice - WP/03/152
  • Official Intervention in the Foreign Exchange Market: Elements of Best Practice - WP/03/152 (Markdown version)
  • Official Intervention in the Foreign Exchange Market: Elements of Best Practice - WP/03/152 (PDF)