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Title: Perverse Effects of Non-sterilized Interventions on Spot Foreign Exchange Rates
Authors: Sağlam, İsmail
Keywords: Exchange rate
central bank intervention
foreign exchange dealers
imperfect competition
Issue Date: Jun-2019
Publisher: SAGE Publications Ltd
Source: Saglam, I. (2019). Perverse Effects of Non-sterilized Interventions on Spot Foreign Exchange Rates. South Asian Journal of Macroeconomics and Public Finance, 8(1), 26-56.
Abstract: We study the effects of non-sterilized intervention on a spot foreign exchange (forex) rate using a multi-period game-theoretical model which involves an unspeci?ed number of competitive traders, a ?nite number of strategic traders (forex dealers) with heterogenous initial money balances, and the central bank of the home country. Simulating the subgame-perfect Nash equilibrium of the two-stage game played by the forex dealers in each period, we show that the non-sterilized intervention of the central bank may lead to a perverse effect on the spot forex rate. We call the mechanism underlying this effect strategic trade switching channel that works when an increase in the central bank’s forex currency demand (supply) exerts such a big upward (downward) effect on the forex rate that some sufficiently big dealers, who optimally bought (sold) forex currency in the previous period when the forex rate was sufficiently low, ?nd in the current period selling (buying) it more pro?table, thus moving the forex rate in a direction undesired by the central bank. JEL Classi?cation: D43, F31, G20.
ISSN:  2277-9787
Appears in Collections:İktisat Bölümü / Department of Economics
Scopus İndeksli Yayınlar Koleksiyonu / Scopus Indexed Publications Collection
WoS İndeksli Yayınlar Koleksiyonu / WoS Indexed Publications Collection

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