Market Volatility and Foreign Exchange Intervention in EMEs: What Has Changed?

372 Pages Posted: 6 Oct 2014

Date Written: October 2013


Huge swings in capital flows to and from emerging market economies (EMEs) over the past five years have led many countries to re-examine their foreign exchange market intervention strategies. Quite unlike their experiences in the early 2000s, several countries that had at different times resisted appreciation pressures suddenly found themselves having to intervene against strong depreciation pressures.

This volume, summarising the discussion and papers presented at the meeting of Deputy Governors of major EMEs in Basel on 21-22 February 2013, addresses three questions. First, what is the role of a flexible exchange rate in stabilising the economy and promoting financial development while preserving stability? Second, how have the motives and strategy behind the interventions changed since the 2008 global financial crisis? Finally, is intervention effective and, if so, how can its efficacy be measured?

The general conclusion is that a flexible exchange rate can play a crucial role in smoothing output volatility in EMEs. But a highly volatile exchange rate can increase output volatility and itself become a source of vulnerability. Most official forex interventions in recent years have aimed to stem volatility, rather than to achieve a particular exchange rate. The majority view was that exchange rate intervention needs to be consistent with the monetary policy stance. Persistent, one-sided intervention, associated with a sharp expansion of central bank and commercial bank balance sheets, creates risks for the economy.

Yet there was no consensus about the effectiveness of forex intervention. Whereas intervention was viewed as an instrument that could in principle curb forex volatility and support market functioning, many participants were sceptical about its effectiveness in practice. While intervention may work mainly through the signalling channel, some of its effectiveness may be due to the fact that it was combined with other measures to moderate capital flows or prevent the build-up of certain positions in the foreign exchange market. In several cases, intervention had no persistent effects on the exchange rate and might have even exacerbated exchange rate volatility.

While the full publication can be downloaded using the above link, individual contributions are available separately: Market Volatility and Foreign Exchange Intervention in EMEs: What Has Changed? – An Overview The Exchange Rate, Real Economy and Financial Markets Capital Flow Dynamics and FX Intervention Impact of Foreign Exchange Interventions on Exchange Rate Expectations Central Bank Views on Foreign Exchange Intervention Recent Developments in the BRL Market Exchange Rate Policy and Exchange Rate Interventions: The Chilean Experience Foreign Exchange Intervention in Colombia Foreign Exchange Interventions as an (Un)Conventional Monetary Policy Tool Monetary Operations Under the Currency Board System: The Experience of Hong Kong Foreign Currency Tenders in Hungary: A Tailor-Made Instrument for a Unique Challenge Intervention in Foreign Exchange Markets: The Approach of the Reserve Bank of India Indonesia: Stabilizing the Exchange Rate Along its Fundamental Rethinking Exchange Rate Policy in a Small Open Economy: The Israeli Experience During the Great Recession Foreign Exchange Market Developments and Intervention in Korea Foreign Exchange Intervention in Malaysia Interventions and Expected Exchange Rates in Emerging Market Economies Foreign Exchange Intervention in Peru A Note on the Effectiveness of Intervention in the Foreign Exchange Market: The Case of the Philippines To What Extent Can Central Banks Influence Exchange Rates with Foreign Exchange Interventions? The Case of Poland The History of the Bank of Russia's Exchange Rate Policy Foreign Exchange Intervention in Saudi Arabia An Exchange-Rate-Centred Monetary Policy System: Singapore's Experience Note on the Foreign Exchange Market Operations of the South African Reserve Bank Foreign Exchange Policy and Intervention Under Inflation Targeting in Thailand Alternative Tools to Manage Capital Flow Volatility Foreign Exchange Intervention by Emerging Market Economies: Issues and Implications Foreign Exchange Intervention in Emerging Market Economies: Lessons, Issues and Implications for Central Banks

JEL Classification: F31, E52, E58

Suggested Citation

Settlements, Bank for International, Market Volatility and Foreign Exchange Intervention in EMEs: What Has Changed? (October 2013). BIS Paper No. 73, Available at SSRN:

Bank for International Settlements (Contact Author)

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