Profits and Losses from Currency Intervention

Hailong Jin and Eun Choi

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: This paper investigates the possible gains from currency intervention by central banks using atwo-period framework in which a trade surplus in one period must be offset by a trade deficitin the next period. It is shown that when the interest rate is zero, the optimal policy isnonintervention. If the interest rate is positive, a country may earn positive profits by incurringa 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 greaterthan the interest rate. The limiting surplus share model suggests that China may have beenlosing money from excessive devaluation of renminbi since 2002.

Keywords: currency intervention; optimal exchange rate (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
Date: 2013-03-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Forthcoming in International Review of Economics and Finance

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http://www2.econ.iastate.edu/papers/p17378-2013-03-07.pdf (application/pdf)
http://www.sciencedirect.com/science/article/pii/S1059056012000895

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Journal Article: Profits and losses from currency intervention (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:37378

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