Is Central Bank Intervention Effective in Stabilizing Exchange Rates?

Summary

The key issue discussed in the paper is how the G-3 and EMS countries have conducted central bank intervention, and whether such intervention was coordinated, sterilized and effective. It is found that G-3 as well as EMS intervention was apparently sterilized, both in its immediate impact and in its long-run consequences. Second, intervention by the G-3 and EMS countries was ineffective in the sense that it did not significantly stabilize bilateral exchange rates in the long-run. It is argued that the predominant use of sterilized intervention, which represents the most ineffective means for stabilizing exchange rates, must be seen as the prime cause for the collapse of the narrow exchange rate bands of the EMS.

This work is also part of a CEPR research programme on Macroeconomics, Politics and Growth in Europe, supported by the Commission of the European Communities under its Human Capital and Mobility Programme (No. ERBCHRXCT930234). Financial support by the Commission of the European Communities and by the Deutsche Forschungsgemeinschaft, Sonderforschungsbereich 303, is gratefully acknowledged. The author thanks Joseph Gagnon, Christian Bordes and Mathiew Canzoneri for detailed comments on earlier drafts of the paper. The usual disclaimer applies. All programmes and data (except the confidential daily intervention data) used in this paper are available on request.