Selective asymmetric intervention and sterilization

John Carlson and Melody Lo

Applied Financial Economics, 2004, vol. 14, issue 11, 823-833

Abstract: Monetary authorities commonly use interventions in foreign exchange markets to influence exchange rates. This paper uses Taiwan's data to show that how interventions respond to external shocks representing depreciation or appreciation pressures depends on other objectives of the monetary authority. If maintaining low inflation is important, then when authorities consider inflation to be too high, asymmetrical interventions are likely to result with more vigorous unsterilized interventions to offset depreciation pressures than to offset appreciation pressures. Empirical evidence from Taiwan supports these patterns when external shocks occur in the yen/US$ exchange rate.

Date: 2004
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DOI: 10.1080/0960310042000203000

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