CAN SECRET INTERVENTION BE COMPATIBLE WITH A NON-PROFITMAKING CENTRAL BANK AND A FUNDAMENTAL-CONSISTENT TARGET?

Authors

  • HSIU-YUN LEE

    1. Lee: Professor, Department of Economics, National Chung Cheng University, Chia-Yi, Taiwan. Phone 886-5-272 0411 ext. 34106, Fax 886-5-2720816, E-mail ecdsyl@ccu.edu.tw
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    • The author thanks all participants at the 4th Conference of Money, Exchange Rates, and Dynamic Equilibrium in Taiwan for their valuable comments. A grant from the NSC of Taiwan (NSC 98-2752-H-194-001-PAE) is also gratefully acknowledged.


Abstract

The coexistence of secret intervention operations and “the signaling channel” (Mussa. The Role of Official Intervention, 1981) seems confusing. Vitale ( Journal of International Economics, 49, 1999, 245–267) resolves this puzzle by employing an asymmetric information framework and an assumption of a fundamental-inconsistent target for the exchange rate. Ferré and Manzano ( International Journal of Finance and Economics, 14, 2009, 378–393) follow Vitale's microstructure framework and argue that the central banks' profitability motivation offers a rationale for their secret intervention even under a target consistent with the fundamentals. However, that the authority uses its superior information to obtain speculative profits through secret intervention in the market is not a typical goal for central banks. To theoretically explain the opaqueness in non-profitmaking central banks' exchange rate policies, we employ a model of a central bank's optimization by considering that no bank really knows the exact fundamental rate and they take into account the possible bad consequences of announcing the intervention. We also show that, in passing the bank's private information to market participants, a bank's announcement of the intervention size is equivalent to revealing its target rate. (JEL E58, F39)

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