Profits and losses from currency intervention

Hailong Jin and Eun Choi

International Review of Economics & Finance, 2013, vol. 27, issue C, 14-20

Abstract: This paper investigates the possible gains from currency intervention by central banks using a two-period framework in which a trade surplus in one period must be offset by a trade deficit in the next period. It is shown that when the interest rate is zero, the optimal policy is nonintervention. If the interest rate is positive, a country may earn positive profits by incurring a trade surplus in the first period. However, there is an upper bound for optimal trade surplus. A country actually may lose money if the rate of devaluation below the equilibrium is greater than the interest rate. The limiting surplus share model suggests that China may have been losing money from excessive devaluation of renminbi since 2002.

Keywords: Currency intervention; Optimal exchange rate; Renminbi (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:27:y:2013:i:c:p:14-20

DOI: 10.1016/j.iref.2012.08.013

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