Is Official Exchange Rate Intervention Effective?

Mark P. Taylor ()

No 3758, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: I examine the effectiveness of exchange rate intervention within the context of a Markov-switching model for the real exchange rate. The probability of switching between stable and unstable regimes depends non-linearly upon the amount of intervention, the degree of misalignment and the duration of the regime. Applying this to dollar-mark data for the period 1985-98, I find that intervention increases the probability of stability when the rate is misaligned, and that its influence grows with the degree of misalignment. Intervention within a small neighbourhood of equilibrium will result in a greater probability of instability.

Keywords: mean reversion; non-linearity; official intervention; real exchange rate (search for similar items in EconPapers)
JEL-codes: C10 F31 F41 (search for similar items in EconPapers)
Date: 2003-02
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