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The impact of FX intervention on FX markets: a market microstructure analysis

โœ Scribed by Paolo Vitale

Publisher
John Wiley and Sons
Year
2010
Tongue
English
Weight
360 KB
Volume
16
Category
Article
ISSN
1076-9307

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โœฆ Synopsis

We formulate a market microstructure model of exchange determination we employ to investigate the impact of foreign exchange (FX) intervention on exchange rates and on FX market conditions. With our formulation we show: (i) how FX intervention influences exchange rates via both a portfolio-balance and a signalling channel; and (ii) derive a series of testable implications which are coherent with a large body of empirical research. Our investigation also proposes some normative recommendations, as we show: (i) that in extreme circumstances large-scale FX intervention can have destabilizing effects for the functioning of FX markets; and (ii) that the route chosen for the implementation of official intervention has important implications for its impact on exchange rates and on market conditions.

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