THE EFFECT OF FORWARD EXCHANGE INTERVENTION: COMMENT.
This paper reduces the effect of forward intervention to two equations. One equation is used when the arbitrage function is infinitely elastic and the other is used in all other cases. This paper first proceeds by deriving both equations and showing how they relate to the literature in the field. <B...
| Publicado en: | Southern Economic Journal Vol. 39; no. 2; pp. 311 - 317 |
|---|---|
| Autor principal: | |
| Formato: | Artículo |
| Publicado: |
Wiley-Blackwell
Oct72
|
| Materias: | |
| Acceso en línea: | Ver este registro en EBSCOhost |
| Sumario: | This paper reduces the effect of forward intervention to two equations. One equation is used when the arbitrage function is infinitely elastic and the other is used in all other cases. This paper first proceeds by deriving both equations and showing how they relate to the literature in the field. <BR> This paper argues that the correct forward intervention policy will depend on the elasticities of the arbitrage and speculative schedules and the exact influence of forward intervention on the expected spot exchange rate. In the relationships which are derived to show the conditions when forward intervention will be successful it is noted that in some cases forward intervention will result in a "trade off" if there is a shift in the speculative demand function even if the arbitrage function is perfectly elastic. Aliber does not consider this situation. In order to show this result a modification of Reading's Model [7] is used. <BR> This note has discussed and attempted to quantify the effects of forward intervention on spot speculation, forward speculation arbitrage and the capital account. The results indicate that if the central bank commitment is known, it must be strong enough and decisive enough so that there is little doubt in the speculators' minds that the central bank will be able to hold the exchange rate. If this condition is not met forward intervention appears to be good only as a very short range exchange stabilization tool. |
|---|