The Political Economy of International Finance in an Age of Inequality
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The Political Economy of International Finance in an Age of Inequality

Soft Currencies, Hard Landings

Edited by Gerald A. Epstein

The essays in this book describe and analyze the current contours of the international financial system, covering both developed and developing countries, and focusing on the ways in which the current international financial system structures, and is affected by, profound inequalities in the international system. This keen analysis of key topics in international finance takes a heterodox perspective, with focus on the role of inequalities in power in shaping the structure and outcomes in the international sphere.
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Chapter 7: The costs of foreign exchange intervention: Trends and implications

Devika Dutt

Abstract

Central banks around the world increasingly intervene in the foreign exchange market for a variety of reasons, such as maintaining exchange rate stability. In fact, research shows that central banks can lean against the macroeconomic policy trilemma through maintaining reserves and intervening in the foreign exchange market, and secure policy space. However, securing this policy space can come at substantial cost. In particular, there are substantial costs associated both with building and holding reserves of foreign exchange and using reserves to intervene in the foreign exchange market. This chapter calculates the costs of foreign exchange intervention undertaken by central banks around the world, and examines how these costs are affected by country characteristics. The chapter shows that foreign exchange intervention and the cost associated with it has increased substantially since the 1990s. Moreover, this cost is higher for developing and emerging economies, countries with more open capital accounts, and countries with access to a de facto international lender of last resort. The chapter also makes policy recommendations for mitigating the costs of foreign exchange intervention.

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