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Monetary History, Exchange Rates and Financial Markets

Essays in Honour of Charles Goodhart, Volume Two

Edited by Paul Mizen

Monetary History, Exchange Rates and Financial Markets is an impressive collection of original papers in honour of Charles Goodhart’s outstanding contribution to monetary economics and policy. Charles Goodhart has written extensively on many of these topics and has become synonymous with his field; the chapters within this book offer a summary of current thinking on his own research subjects and include perspectives on controversies surrounding them.
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Chapter 5: Is foreign exchange intervention effective? The Japanese experiences in the 1990s

Takatoshi Ito


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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