Foreign exchange intervention: Practice of Foreign Exchange Intervention
In mostmature economies with floating exchange rates and open capital markets, intervention now occurs only infrequently.Although central banks engaged in more frequent unilateral and concerted intervention during some earlier periods, such as the 1980s, their intervention in the early 21st century was quite limited. For the central banks that issue the major international currencies, intervention when it does occur is usually small relative to the overall size of the foreign exchange market. It also typically takes the form of sterilized intervention. The only notable exception is the Bank of Japan, which has intervened frequently, and sometimes extensively. The European Central Bank and the U.S. Federal Reserve Board, for example, may let years go by without carrying out any intervention at all; and, when they do intervene, their intervention is sterilized routinely. Even the Bank of Canada, which had a policy of regular and automatic intervention until the mid-1990s, countenances intervention only in exceptional circumstances. For mature economies, extended central bank absence from the foreign exchange market is the norm.
The monetary authorities in many emerging economies, on the other hand, still intervene heavily in the foreign exchange market. In 2000 2006, the monetary authorities in China, in several of the oil exporting countries, and in a handful of emerging market countries sold off large quantities of their own currencies. In doing so, they accumulated immense holdings of foreign currency reserves.
Intervention among emergingmarket countries is most prevalent in those with exchange rate targets. Their intervention in some cases is unsterilized, and the corresponding changes in monetary conditions affect the exchange rate directly. In other cases, particularly where intervention occurs in a setting with significant barriers to capitalmobility, it is sterilized. This combination of sterilized intervention and barriers to capital mobility is thought to enable a country to maintain a relatively weak exchange rate without engendering domestic inflation. It is also exactly this combination of sterilized intervention and capital controls that so frustrates the trading partners of a few emerging market countries and provokes accusations of excessive currency manipulation.