Official Foreign Exchange Intervention

This Occasional Paper aims to develop a deeper understanding of foreign exchange intervention in emerging markets. Central banks intervene in the foreign exchange market for several reasons, including to caIm disorderly markets, correct misalignments, and accumulate reserves. The prevalence of central bank intervention in emerging markets bas led to renewed interest in how central banks should intervene to maximize their efficacy. This paper sheds light on a number of operational aspects of intervention. It also presents evidence on intervention practices and characteristics based on a survey on the organization of foreign exchange markets in developing countries. The survey was carried out in 2001 by the International Monetary Fund. Finally, the paper presents empirical evidence on the effectiveness of intervention in Mexico and Turkey, two countries where intervention data are publicly available. The authors emphasize that intervention is Dot an independent policy tool and is most effective when the exchange rate policy is consistent with other macroeconomic policies. The authors are grateful to Stefan Ingves and Herve Ferhani for their support for this project. We would like to thank Kai Barvell, Hali Edison, Shyamala Gopinath, Scott Roger, Barry Topf, and Mark Zelmer for insightful comments on earlier drafts. The authors are also indebted to Nirmaleen F. Jayawardane and Ranee Sirihorachai for their excellent assistance in the preparation of the manuscript, and to Gail Berreand David Einhorn of the External Relations Department for editing and coordinating production of the publication. The views expressed in this paper are solely those of the authors and do Dot necessarily reflect the views or policies of the national authorities or the International Monetary Fund or its Executive Directors.