The liquidity effects of foreign exchange intervention |
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Authors: | Wai-Ming Ho |
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Affiliation: | Department of Economics, York University, 4700 Keele Street, Toronto, ON M3J 1P3, Canada |
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Abstract: | This paper examines the effectiveness of foreign exchange intervention in a two-country, two-currency, general equilibrium model that allows for liquidity effects. Both sterilized and non-sterilized intervention operations have significant impacts on the allocation of liquidity in international financial markets. Whether intervention is successful in moving the exchange rate in the desirable direction depends upon the degree of sterilization of intervention and the intratemporal elasticity of substitution of the consumption goods. The model shows that there exist circumstances in which the response of exchange rate to intervention is ‘perverse’ as documented in the empirical literature. |
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Keywords: | Foreign exchange market Sterilized and non-sterilized intervention Liquidity effects |
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