Publication

In contrast to academic recommendations, monetary authorities all over the world intervene on the foreign exchange market to actively manage exchange rates. Particularly in the aftermath of the global financial crisis exchange rates are abused by some countries in “currency wars” to artificially improve their own competitiveness, thereby harming trading partners. Aside from these heavily debated activities a number of open economies try to shield their currency from the irrational exuberance of international investors and use interventions to maintain exchange rates around their fundamental levels. This study shows theoretically and empirically how intervention operations can be effective in the latter sense.