In the Foreign Exchange market, `intervention' indicates the buying and selling of foreign currency by the Central Bank of the country or other agent of the government to influence the value of exchange rate. This article deals with the related issues in greater detail.
Developed
countries do not need `intervention'. There is no much
impact of `intervention' in the real exchange rate.
It hampers the viable state of the tradable sector.
If the `intervention' is more, it results in weakening
the stance of monetary policy. Emerging market economies
do intervene. `Intervention' is more effective in the
emerging economies. Emerging market economies in Asia
accumulated huge forex reserves in recent years. (See
Table 1) This is due to the huge purchase of US treasury
bonds by the Asian Central Banks (ACBs) to facilitate
US to finance its current account deficit. This would
result in more sterilization costs. Also, it may lead
to inflation and also to domestic financial crises.
On the other hand, if the central bank does not hold
US dollar as reserves, it leads to depreciation of the
US dollar and finally interest rate rises.
China,
India, Indonesia, Korea, Malaysia, the Philippines,
Singapore and Thailand constitute Asian emerging market
economies.
The
forex intervention is influenced by the factors such
as, the nature of the exchange rate regime viz. fixed,
flexible or managed, the foreign exchange policy of
the country, the status of foreign exchange market,
etc. The short-run exchange rate movement depends on
the present and expected future fundamentals of the
country. In the short-run, the volatility of exchange
rate is caused due to the non-fundamental factors such
as, information cascades and herd behavior or speculation
about the market.
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