Monetary History, Exchange Rates and Financial Markets Essays in Honour of Charles Goodhart, Volume Two
Essays in Honour of Charles Goodhart, Volume Two
Edited by Paul Mizen
Chapter 5: Is foreign exchange intervention effective? The Japanese experiences in the 1990s
5. Is foreign exchange intervention eﬀective? The Japanese experiences in the 1990s Takatoshi Ito* 1. INTRODUCTION Foreign exchange interventions have been one of the most secretive activities of monetary authorities around the world. They have been always a source of controversy, both in the academic literature and in practice. Some have believed that intervention cannot be eﬀective based on a popular monetary model of determining the exchange rate, and also argued that the size of intervention tends to be overwhelmed by the market size, especially for major currencies. Others have argued that in some instances, interventions seemed to be eﬀective by changing the sentiment of the market through signalling the future changes of policy. Some models, they also argue, that take into account the risk diﬀerence between domestic and foreign bonds would show some inﬂuences of intervention through portfolio shifts among the private sector. A dominant view on eﬀectiveness of intervention has changed the side a few times in the past decades. The monetary authorities tended to intervene heavily in the foreign exchange market during the transition from the Bretton Woods system which collapsed in August 1971 to the ﬂoating of major currencies in the beginning of 1973. Even after the ﬂoating began, some monetary authorities in large economies were believed to be intervening heavily in the foreign exchange market. In the early 1980s, the Jurgensen study (1983; also Edison, 1993), which beneﬁted from obtaining data from the participating authorities as a part...
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