Non-Sterilized Interventions May Yield Perverse Effects on Spot Foreign Exchange Rates

29 Pages Posted: 17 Apr 2017

See all articles by Ismail Saglam

Ismail Saglam

TOBB University of Economics and Technology

Date Written: April 13, 2017

Abstract

We study the effects of non-sterilized intervention on a spot foreign exchange rate using a multi-period game-theoretical model which involves an unspecified number of competitive traders, a finite number of strategic traders (forex dealers), and the central bank of the home country. Simulating the subgame-perfect Nash equilibrium of the two-stage game played by the strategic traders in each period, we show that the non-sterilized intervention of the central bank may lead to a perverse result. This result may arise when the intervention becomes strong enough to unintentionally induce some of the strategic traders - who have previously traded in the direction desired by the monetary authority - to optimally switch to the opposite trade direction.

Keywords: Exchange rate, central bank intervention, foreign exchange dealers, imperfect competition

JEL Classification: D43, F31, G20

Suggested Citation

Saglam, Ismail, Non-Sterilized Interventions May Yield Perverse Effects on Spot Foreign Exchange Rates (April 13, 2017). Available at SSRN: https://ssrn.com/abstract=2952892 or http://dx.doi.org/10.2139/ssrn.2952892

Ismail Saglam (Contact Author)

TOBB University of Economics and Technology ( email )

Faculty of Economics and Administrative Sciences
Söğütözü Cad. 43,
Ankara, Cankaya
Turkey

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