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Intervention and Exchange Rate Stabilization Policy in Developing Countries
Author(s) -
Hutchison Michael M.
Publication year - 2003
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/1468-2362.00108
Subject(s) - exchange rate flexibility , economics , exchange rate , monetary economics , currency , developing country , sterilization (economics) , volatility (finance) , monetary policy , exchange rate regime , international economics , swap (finance) , foreign exchange market , financial economics , finance , economic growth
Recent evidence based on event studies demonstrates the short‐run effectiveness of sterilized (non‐monetary) intervention to stabilize exchange rates. This role is especially important for developing economies where currency volatility is frequently tied to unstable market expectations, herding behaviour and contagion, rather than ‘fundamental’ macroeconomic imbalances. Intervention coordinated with several governments is more likely to succeed in moving exchange rates in the desired direction. The Chiang Mai Initiative (CMI) is a step towards greater cooperation on exchange rate management in Asia, but its main component is a limited US dollar swap agreement between Japan and developing economies and is conditional on an IMF financial package. A much stronger political, as well as economic, commitment to intervene in exchange markets than currently embodied in the CMI would be needed to reduce exchange rate volatility in the region and to ward off future speculative attacks. Greater currency stability, in turn, would give developing economies more flexibility to use monetary and fiscal policy to pursue domestic stabilization policy objectives.