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BIS Papers No 24: Foreign Exchange Market Intervention in Emerging BIS Papers No 24 Foreign exchange market intervention in emerging markets: motives, techniques and implications Monetary and Economic Department May 2005 Papers in this volume were prepared for a meeting of senior officials from central banks held at the Bank for International Settlements in December 2004. The views expressed are those of the authors and do not necessarily reflect the views of the BIS or the central banks represented at the meeting. Individual papers (or excerpts thereof) may be reproduced or translated with the authorisation of the authors concerned. Requests for copies of publications, or for additions/changes to the mailing list, should be sent to: Bank for International Settlements Press & Communications CH 4002 Basel, Switzerland E-mail: [email protected] Fax: +41 61 280 9100 and +41 61 280 8100 © Bank for International Settlements 2005. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1609-0381 (print) ISBN 92-9131-687-3 (print) ISSN 1682-7651 (online) ISBN 92-9197-687-3 (online) Participants in the meeting Algeria Ali Touati Vice Governor Argentina Alberto Camarasa Director, Member of the Board Juan Ignacio Basco Principal Manager of Credit Brazil Rodrigo Azevedo Deputy Governor for Monetary Policy Chile José De Gregorio Deputy Governor China Su Ning Deputy Governor He Jianxiong Deputy Director-General, International Department Colombia José Darío Uribe General Manager Czech Republic Luděk Niedermayer Vice Governor Hong Kong SAR Peter Pang Deputy Chief Executive Hungary Zsolt Érsek Head of Money Markets and Foreign Exchange Department Indonesia Aslim Tadjuddin Deputy Governor Zainal Abidin Deputy Director, Directorate of Reserve Management Israel Meir Sokoler Deputy Governor Korea, Republic of Eun Mo Lee Deputy Director General, International Department Mexico José Julián Sidaoui Dib Deputy Governor Peru Adrián Armas Deputy Manager, Monetary Division Poland Jerzy Pruski First Deputy President Janusz Zielinski Head of Financial Markets Division Russian Federation Konstantin N Korischenko Deputy Chairman Saudi Arabia Muhammad Al-Jasser Vice Governor Ahmed Banafe Investment Adviser BIS Papers No 24 iii Singapore Ong Chong Tee Assistant Managing Director, Monetary Policy and Investment South Africa Ian Plenderleith Deputy Governor Thailand Bandid Nijathaworn Deputy Governor Turkey Fatih Özatay Vice Governor Venezuela Iván Giner Vice President of Economic Studies Bank for International Settlements William R White The Economic Adviser, Head of the Monetary and Economic Department Már Gudmundsson Deputy Head of Monetary and Economic Department Philip Turner Head of Secretariat Group David Archer Adviser Gabriele Galati Head of Monetary Policy and Exchange Rates Dubravko Mihaljek Senior Economist Madhusudan Mohanty Senior Economist Ramon Moreno Head of Emerging Market Issues Paul Moser-Boehm Senior Economist Agustin Villar Senior Economist BIS Representative Office Camilo Tovar for the Americas Economist BIS Representative Office Corrinne Ho for Asia and the Pacific Senior Economist iv BIS Papers No 24 Contents Participants in the meeting .................................................................................................................. iii BIS background papers Foreign exchange market intervention in emerging market economies: an overview.............................1 Motives for intervention Ramon Moreno.........................................................................................................................................4 Governance aspects of foreign exchange interventions Paul Moser-Boehm.................................................................................................................................19 Foreign exchange market intervention: methods and tactics David Archer...........................................................................................................................................40 Intervention: what are the domestic consequences? M S Mohanty and Philip Turner..............................................................................................................56 Survey of central banks’ views on effects of intervention Dubravko Mihaljek..................................................................................................................................82 The effectiveness of foreign exchange intervention in emerging market countries Piti Disyatat and Gabriele Galati ............................................................................................................97 Contributed papers Foreign exchange intervention in Argentina: motives, techniques and implications Claudio Irigoyen....................................................................................................................................114 Provision of FX hedge by the public sector: the Brazilian experience Afonso Bevilaqua and Rodrigo Azevedo.............................................................................................119 Flexible exchange rate regime and forex intervention José De Gregorio and Andrea Tokman R............................................................................................127 Foreign exchange market intervention in Colombia José Darío Uribe and Jorge Toro........................................................................................................139 Forex interventions: the Czech experience Tomáš Holub ........................................................................................................................................150 Foreign exchange market operations: the recent experience of Hong Kong Peter Pang............................................................................................................................................162 Defending the strong side of the band: the Hungarian experience Zsolt Érsek............................................................................................................................................171 Foreign exchange intervention and policy: Bank Indonesia experiences Bank Indonesia.....................................................................................................................................177 Approaching a decade of no foreign exchange intervention - lessons from Israel Meir Sokoler .........................................................................................................................................188 Foreign exchange intervention and foreign exchange market development in Korea Gwang-Ju Rhee and Eun Mo Lee........................................................................................................196 Central banking intervention under a floating exchange rate regime: ten years of Mexican experience José Julián Sidaoui ..............................................................................................................................209 The Reserve Bank of New Zealand’s new foreign exchange intervention policy Kelly Eckhold and Chris Hunt...............................................................................................................231 BIS Papers No 24 v Forex interventions in Peru: 2002-2004 Adrián Armas ....................................................................................................................................... 242 Exchange rate policy and foreign exchange interventions in Poland Jerzy Pruski and Piotr Szpunar ........................................................................................................... 255 Foreign exchange intervention in Saudi Arabia Muhammad Al-Jasser and Ahmed Banafe.......................................................................................... 265 South Africa: official foreign exchange operations South African Reserve Bank ............................................................................................................... 273 Foreign exchange policy and intervention in Thailand Financial Markets Operations Group, Bank of Thailand...................................................................... 276 Monetary and exchange rate policies in the post-crisis period in Turkey Fatih Özatay ........................................................................................................................................ 283 Foreign exchange intervention in Venezuela Iván Giner and Omar Mendoza ........................................................................................................... 292 Previous volumes from Deputy Governors’ Meetings................................................................... 301 vi BIS Papers No 24 Foreign exchange market intervention in emerging market economies: an overview On 2 and 3 December 2004, the BIS hosted a meeting of Deputy Governors of central banks from major emerging market economies to discuss foreign exchange market intervention. While few developed countries have actively intervened within the last decade, the outstanding exception being Japan, intervention has been commonplace in the emerging market community. There are several reasons why developed countries no longer actively intervene. One is that research and experience suggest that the instrument is only effective (at least beyond the very short term) if seen as foreshadowing interest rate or other policy adjustments. Without a durable and independent impact on the nominal exchange rate, intervention is seen as having no lasting power to influence the real
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