• Felix Hüfner
Part of the ZEW Economic Studies book series (ZEW, volume 23)


The above statement by Lars Svensson exemplifies that up to now foreign exchange interventions are not recognised as an instrument for central banks that pursue inflation targeting. This contrasts with the observation that intervention operations are actually undertaken in reality, also by inflation targeting countries, as is evident from news reports (see appendix for a list). The Swedish Riksbank, for example, writes: “Interventions play a role in a central bank’s range of instruments.” (Riksbank, 2001b: 19). Obviously, there is a discrepancy between academics and practitioners concerning the use of interventions in inflation targeting.


Exchange Rate Interest Rate Monetary Policy Central Bank Foreign Exchange 
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  1. 1.
    In the following we will always refer to foreign exchange intervention as sterilised (i.e. interventions that do not alter the monetary base) by central banks unless indicated otherwise.Google Scholar
  2. 2.
    A report in the early 1980s (the so-called Jurgensen study) found that sterilised interventions have little impact on exchange rates. However, only a few years later with the apparent success of the Plaza Accord in 1985 this view became increasingly challenged.Google Scholar
  3. 3.
    As Baillie et al. (1999) state: “[…] very few studies have looked at the role of intervention within the overall macro-policy mix.” (p. 20).Google Scholar
  4. 4.
    While a central bank may also opt to control the monetary base in contrast to a short-term interest rate, ‘interest rate targeting’ is the prevalent strategy among central banks today.Google Scholar
  5. 5.
    For a detailed and recent illustration of the monetary transmission channel see Kuttner and Mosser (2002).Google Scholar
  6. 6.
    As will be discussed in more detail in later chapters, the exchange rate also has an effect on aggregate demand (via the competitiveness of the economy). Thus, exchange rate pass-through and aggregate demand channel cannot be separated completely in practice. However, for illustrative purposes we divide both channels in the stylised model presented in Figure 1.Google Scholar

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© Springer-Verlag Berlin Heidelberg 2004

Authors and Affiliations

  • Felix Hüfner
    • 1
  1. 1.Centre for European Economic Research (ZEW)MannheimGermany

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