Currency and Competitiveness in Europe
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Currency and Competitiveness in Europe

Edited by Klaus Liebscher, Josef Christl, Peter Mooslechner and Doris Ritzberger-Grünwald

This book combines currency matters with competitiveness considerations, with a view to raising the understanding of exchange rate dynamics and to analysing the role of exchange rates in reinforcing economic competitiveness.
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Chapter 10: The Impact of Exchange Rate Interventions and Communication Over the Medium Term

Marcel Fratzscher


Marcel Fratzscher1 INTRODUCTION 10.1 Since the mid-1980s, some monetary authorities, such as those in Japan, have periodically conducted substantial purchases or sales in FX markets, often supported by ‘oral interventions’. Others, such as the US and euro area authorities, basically abandoned direct market interventions in the mid-1990s and have since relied on communication as their primary policy tool to affect exchange rates. Assessing the success of those different routes, the literature on FX market interventions has found mixed and partly supportive evidence that FX purchases and sales may help move currencies in the desired direction (for example, Edison, 1993; Sarno and Taylor, 2001). More recently, policy makers (Rubin and Weisberg, 2003) have argued and academic research (for example, Fratzscher, 2004; Jansen and de Haan, 2005) has found that communication may have a significant impact on exchange rates. The literature on the role of communication, while still in its infancy, constitutes a first step towards understanding appropriate monetary policy design. Two important questions arise from the literature that have not been answered conclusively yet. First, through which channels do oral and actual interventions affect exchange rate developments? Second, how effective are such interventions in the longer term? From a conceptual perspective, interventions may affect exchange rates through three channels. First, through the portfolio balance channel: FX purchases or sales by a monetary authority alter the relative supply and demand of domestic versus foreign assets, thus altering the exchange rate even given sterilized interventions due to...

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