Handbook of Exchange Rates

26.4 Conclusions

What are the motives behind official interventions? Are they successful in affecting exchange rates? And through what channels and mechanisms do interventions do so? The chapter has focused on these three questions, presenting empirical evidence and drawing on a large and continuously growing literature at the intersection of international macroeconomics and finance. As to the first of these questions, while there may be a precautionary motive behind some of the reserve accumulation in EMEs over the past decade, the chapter has presented evidence that suggests that these have primarily been driven by the motive of having weak and undervalued exchange rates, so as to improve competitiveness and exports as well as to attract foreign investment. Such a policy of EMEs has not only raised the risk of a “currency war,” in which several countries pursue competitive devaluations, but it also has various costs and benefits, in particular in terms of a loss of monetary policy autonomy, the misallocation of capital, and global financial market distortions.

As to the second question, the evidence from the two methodological approaches—time-series and event-study models—indicate that FX interventions may indeed be effective in both moving the level of exchange rates and by affecting the underlying volatility of FX markets. Importantly, the success of official interventions is conditional on a multitude of factors, in particular the market environment as well as how exactly ...