Exchange Rate Variability and Exchange Market Intervention: Spot vs. Forward

Hui-Kuan Tseng

International Economic Journal, 1998, vol. 12, issue 2, 1-16

Abstract: The paper compares forward and spot market interventions by examining their effects on exchange rate fluctuations. Using a stochastic partial equilibrium model, it is shown that the two interventions fail to limit spot rate fluctuations caused by shocks that do not perturb traders' hedging activity directly. When shocks perturb this hedging activity in the first place, however, it is shown that intervention via spot exchange may trigger very large fluctuations once it cannot sufficiently counteract hedgers' and speculators' combined response to risk premia. In this case, by contrast, the forward intervention can dampen exchange rate variability. [F31]

Date: 1998
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DOI: 10.1080/10168739800000010

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