Foreign Exchange Intervention: Theory and Evidence.

• Author: Tiwari, Kashi Nath

In the post-cold war era, the global financial marketplace is constantly evolving. The global community is increasingly embracing the principles of the free market system in order to improve its standard of living. During the reconstruction period, some exchange rate volatility is unavoidable. For the stability of the global exchange rate markets and for the optimal use of the world's scarce resources, a closer cooperation among countries on monetary, fiscal, and trade policies is warranted. Isolated domestic policies with disregard to global consequences, however beneficial in the short run, may lead to irreparable economic disaster.

The subject matter of this book is timely and the information contained in this book is indispensable for academicians, practitioners, and policymakers. It is a welcomed addition to the literature on foreign exchange interventions. Utilizing daily intervention figures from the Bundesbank and the Federal Reserve System, the author presents the facts with clarity and offers thought-provoking insightful analysis of the game strategies adopted by the central banks and rational market participants. The study is particularly important in that it utilizes confidential and publicly unavailable daily intervention data of the Bundesbank. The rational speculators would negate the potential impact of foreign exchange interventions. The marketplace is distorted by interventions that produce inefficiencies with asymmetric information. To what extent can market participants be assumed to be rational under such interventions?

Within the framework of the free market system, disequilibriums are short-term phenomena. The forces of demand and supply eliminate market distortions through a self-correcting price adjustment mechanism. Government interventions create, rather than solve, the disequilibrium problems for financial and real sectors of an economy. Central bank interventions do not solve disequilibrium problems of foreign currency markets. In spite of the historical evidence against intervention, central banks continue to intervene in foreign currency markets. The author offers some explanations for such foreign exchange interventions.

The results of the theoretical models are supplemented through rigorous empirical studies. The endnotes of each chapter provide crucial information to readers. The study is comprehensive and well-documented with an exhaustive list of references. The author provides a European perspective on...