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

Saglam, Ismail (2017): Non-Sterilized Interventions May Yield Perverse Effects on Spot Foreign Exchange Rates.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange rate; central bank intervention; foreign exchange dealers; imperfect competition
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General

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