“Leaning against the wind” through interest rate management: The EMS in the period from 1979 to 1988
In the previous chapter, we have seen that during the period from 1979 to 1988, all ERM central banks intervened in the foreign exchange markets in a “leaning-against-the-wind” manner. The expected behavior in a cooperative exchange rate regime was, therefore, followed. However, a feature which is also common to the investigated foreign exchange markets is that interventions were sterilized by offsetting operations in the money markets. The combination of these two reactions — “leaning against the wind” and sterilization — made the exchange market intervention an ineffective instrument for countering the trends in the exchange rates. Furthermore, the use of sterilized interventions with the purpose of countering depreciations, has shown to be an extremely costly policy — at least in some countries — in terms of the loss of foreign reserves.
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