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The Elephant Hiding in the Room: Currency Intervention and Trade Imbalances

Joseph Gagnon

No WP13-2, Working Paper Series from Peterson Institute for International Economics

Abstract: Official purchases of foreign assets--a broad definition of currency intervention--are strongly correlated with current account (trade) imbalances. Causality runs in both directions, but statistical analysis using instrumental variables reveals that the effect of official asset purchases on current accounts is very large. A country's current account balance increases between 60 and 100 cents for each dollar spent on intervention. This is a much larger effect than is widely assumed. These results raise serious questions about the efficiency of international financial markets.

Keywords: current account; financial flows; foreign exchange reserves (search for similar items in EconPapers)
JEL-codes: F30 F31 F32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-opm
Date: 2013-03
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