Coordinated Intervention Intervention more likely to be effective when it is coordinated by several central banks.
24 Exhibit 6.4 Forms of Central Bank Intervention in the Foreign Exchange Market
25 Indirect Intervention – t he Fed can affect the dollar’s value indirectly by influencing the factors that determine it. Government Intervention rates exchange future of ns expectatio in change controls government in change level income s country' foreign the and level income U.S. e between th al differenti in the change rate interest s country' foreign the and rate interest U.S. e between th al differenti in the change inflation s country' foreign the and inflation S. between U. al differenti in the change rate spot in the change percentage where ) , , , , ( EXP GC INC INT INF e EXP GC INC INT INF f e
26 Indirect Intervention (cont.) Government Control of Interest Rates by increasing or reducing interest rates. Government Use of Foreign Exchange Controls such as restrictions on the exchange of the currency. Intervention Warning s intended to warn speculators. The announcements could discourage additional speculation and might even encourage some speculators to unwind (liquidate) their existing positions in the currency. Indirect Intervention
28 Exhibit 6.5 How Central Bank Intervention Can Stimulate the U.S. Economy
29 Exhibit 6.6 How Central Bank Intervention Can Reduce Inflation
Chapter Questions 1.Should China be forced to alter the value of its currency?2.What is the impact of a weak home currency on the home economy, other things being equal? What is the impact of a strong home currency on the home economy, other things being equal?3.If most countries in Europe experience a recession, how might the European Central Bank use direct intervention to stimulate economic growth? 30
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