The Dynamic Effects of Exchange Market Intervention Policy: Two Extreme Views and a Synthesis

Abstract

Under a regime of managed floating, one policy instrument available to authorities is exchange market intervention policy, purchases or sales of assets denominated in foreign currency in exchange for assets denominated in home currency. SInce, in general, an economy does not reach its new long-run equilibrium immediately following an exchange market intervention, a complete analysis ofthe effects of this policy must include description of the path followed by the economy as it adjusts to its new long-run equilibrium. This paper is a study of the dynamic effects of the particular type of intervention policy, a purchase of foreign money with home money.

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