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Handbook of Exchange Rates by Lucio Sarno, Ian Marsh, Jessica James

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26.3 Empirical Evidence on the Effectiveness of Official FX Interventions

Are FX interventions effective and successful in achieving their objective? While the choice and management of exchange rate regimes are treated in depth in other chapters of this handbook, much of the empirical literature has focused on the question of the effectiveness of FX interventions in floating exchange rate regimes.2 The reason for this is twofold. The first is that in managed exchange rate regimes—where frequently also some forms of capital controls are in place—the effect of FX interventions on exchange rates is hard to determine as markets may not function freely and face various distortions. The second, more pragmatic reason has to do with the availability of data on official FX interventions. This has been one of the most severe constraints for researchers when addressing the issue of effectiveness of interventions. To date, it has been mainly the advanced economies that have published their FX intervention activity, although such data is partially becoming available also for a small set of emerging economies. Hence, the focus in this section is on the effectiveness of interventions for the three major global currencies: the US dollar, the yen, and the euro (and Deutsche mark before the creation of the euro in 1999).

This section proceeds by presenting a simple stylized model to define the concept of “effectiveness” of official interventions and to illustrate the different channels through which ...

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