Non-Sterilized Interventions May Yield Perverse Effects on Spot Foreign Exchange Rates

Ismail Saglam

MPRA Paper from University Library of Munich, Germany

Abstract: We study the effects of non-sterilized intervention on a spot foreign exchange rate using a multi-period game-theoretical model which involves an unspecified number of competitive traders, a finite number of strategic traders (forex dealers), and the central bank of the home country. Simulating the subgame-perfect Nash equilibrium of the two-stage game played by the strategic traders in each period, we show that the non-sterilized intervention of the central bank may lead to a perverse result. This result may arise when the intervention becomes strong enough to unintentionally induce some of the strategic traders -who have previously traded in the direction desired by the monetary authority- to optimally switch to the opposite trade direction.

Keywords: Exchange rate; central bank intervention; foreign exchange dealers; imperfect competition (search for similar items in EconPapers)
JEL-codes: D43 F31 G20 (search for similar items in EconPapers)
Date: 2017-04-13
New Economics Papers: this item is included in nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:78284

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