Studies On Strategy And Effectiveness Of Foreign Exchange Intervention

Since the Bretton Wood System collapsed in 1973, foreign exchange rate fluctuated frequently, and the foreign exchange intervention became an important economic policy tool in most countries to maintain the stabilization or influence the trend of the exchange rate. The study of this issue is of significance in both theory and practice.The central bank should make clear the intervention goals, intervention operations, transmission mechanism and the effectiveness of foreign exchange intervention in different economic conditions, so that it will increase the efficiency of intervention. The international researches about the foreign exchange intervention have evolved greatly and some mature economics theories in the western countries have formed. But in developing countries, the financial market is imperfect and monetary authorities manage foreign exchange market strictly, the experiences in developed countries are not suitable for developing countries. With the comparisons and analysis of foreign exchange intervention in developed countries, we will get a path for China. The foreign exchange intervention of the central bank in China, especially the effectiveness of intervention and the intervention strategies, would be the subject of this thesis.This thesis includes six chapters, and according to the logic relation, they can be classified into three parts. The first part includes two chapters. Chapter one is introduction, which gives the theme, significance, logic chain and framework of this research. Chapter two introduces the theoretical framework, including the definition of the foreign exchange intervention and related concepts, the basis of decision, the precondition and the effect channel of the monetary authority intervention.The second part, including chapter three and four, identifies the strategies and effectiveness of the foreign exchange intervention in western countries. Firstly, chapter three describes the structure characteristics of the foreign exchange market, including the market structure, trading mechanism and ETP. Then, it reviews the typical operations of foreign exchange intervention in both the emerging market countries and the western industrialized countries, and further analyzes the common characteristics of the succeeded interventions. Lastly, discusses the time and methods strategies of the interventions in the western countries. Chapter four tests the effectiveness, signal channel, size effect and persistent effect of interventions in the U.S., Japan and European countries.The last part includes Chapter five and six. This part describes the developing status of foreign exchange market and intervention in China, and tests the effectiveness of intervention in China. At last, based on the cost and benefit analysis, it formulates recommendations on the foreign exchange market and interventions of China. In Chapter five, after introducing the development history and characteristics of the foreign exchange market in China, it points out the present problems and analyzes the methods, features and effectiveness of interventions in the current market conditions. After the qualitative analysis, it tests the goals, the effectiveness and the effect channels of interventions in China by empirical analysis, and draws the conclusions:The interventions in China are leaning against the wind and are effective through the portfolio channel. In Chapter six, learning from the methods of Ito(2002), calculates the costs and benefits of intervention in China from the microscopic view. We will find it is a loss of intervention. From the macroscopic view, the benefit is more than the cost, but the cost is high. So we should not maintain the against wind intervention over long term. At last, gives the suggestions on the strategies of intervention in China.The conclusions and innovations of this thesis are as follows:Firstly, this thesis pays close attention to the effects of the micro variables, such as the methods, time, and size of intervention. Secondly, according to the empirical tests, we can draw a conclusion:different intervention strategies and methods will influence the effectiveness of intervention greatly. The effect will be not persistent, even if an effective intervention. Then gives the policy recommendations on the strategies of foreign exchange intervention in light of the conclusion of empirical research mentioned above, referring to foreign experience and actual condition in China. Lastly, this thesis discusses the goal conversion, methods and the reasons for failure or success of the emerging market countries intervention, such as Brazil and Russia, in the context of the financial crisis.