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The Mechanics of Central Bank Intervention in Foreign Exchange Markets

Kaushik Basu

Working Papers from Cornell University, Center for Analytic Economics

Abstract: Central banks in developing countries, wanting to devalue the domestic currency, usually intervene in the foreign exchange market by buying up foreign currency using domestic money--often backing this up with sterilization to counter inflationary pressures. Such interventions are usually effective in devaluing the currency but lead to a build up of foreign exchange reserves beyond what the central bank may need. The present paper analyzes the 'mechanics' of such central bank interventions and, using techniques of industrial organization theory, proposes new kinds of interventions which have the same desired effect on the exchange rate, without causing a build up of reserves.

JEL-codes: D43 F31 G20 L31 (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
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Handle: RePEc:ecl:corcae:09-02