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How to devalue exchange rates, without building up reserves: Strategic theory for central banking

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  • Basu, Kaushik

Abstract

Central banks, wanting to devalue their currency, often intervene in the foreign exchange market by buying up foreign currency. Such interventions even if effective lead to a build up of foreign exchange reserves. This paper argues that the coupling of devaluation and reserve build up can be avoided if the central bank intervention takes the form of a ‘schedule’, that is, commitment to buying and selling conditional on the exchange rate.

Suggested Citation

  • Basu, Kaushik, 2012. "How to devalue exchange rates, without building up reserves: Strategic theory for central banking," Economics Letters, Elsevier, vol. 117(3), pages 758-761.
    • Handle: RePEc:eee:ecolet:v:117:y:2012:i:3:p:758-761
    DOI: 10.1016/j.econlet.2011.12.069
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    References listed on IDEAS

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    1. Bresnahan, Timothy F, 1981. "Duopoly Models with Consistent Conjectures," American Economic Review, American Economic Association, vol. 71(5), pages 934-945, December.
    2. Basu, Kaushik & Morita, Hodaka, 2006. "International credit and welfare: A paradoxical theorem and its policy implications," European Economic Review, Elsevier, vol. 50(6), pages 1507-1528, August.
    3. Encaoua, David & Jacquemin, Alexis, 1980. "Degree of Monopoly, Indices of Concentration and Threat of Entry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 87-105, February.
    4. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
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    Cited by:

    1. Basu, Kaushik & Varoudakis, Aristomene, 2013. "How to move the exchange rate if you must: the diverse practice of foreign exchange intervention by central banks and a proposal for doing it better," Policy Research Working Paper Series 6460, The World Bank.
    2. Saglam, Ismail, 2017. "Non-Sterilized Interventions May Yield Perverse Effects on Spot Foreign Exchange Rates," MPRA Paper 78284, University Library of Munich, Germany.
    3. Ismail Saglam, 2019. "Perverse Effects of Non-sterilized Interventions on Spot Foreign Exchange Rates," South Asian Journal of Macroeconomics and Public Finance, , vol. 8(1), pages 26-56, June.
    4. Jose E. Gomez-Gonzalez & Julian A. Parra-Polania & Mauricio Villamizar-Villegas, 2016. "Announcements are not Enough: Foreign Exchange Intervention under Imperfect Credibility," Borradores de Economia 949, Banco de la Republica de Colombia.
    5. Basu Kaushik, 2014. "The Art of Currency Manipulation: How Some Profiteer by Deliberately Distorting Exchange Rates," Journal of Globalization and Development, De Gruyter, vol. 4(2), pages 199-211, February.
    6. Basu, Kaushik, 2013. "The art of currency manipulation : how to profiteer by deliberately distorting exchange rates," Policy Research Working Paper Series 6608, The World Bank.
    7. Valentina Cepeda & Bibiana Taboada-Arango & Mauricio Villamizar-Villegas, 2023. "Can Central Bank Credibility Improve Monetary Policy? A Meta-Analysis," Borradores de Economia 1239, Banco de la Republica de Colombia.
    8. Bitar, Joseph, 2021. "Foreign Currency Intermediation: Systemic Risk and Macroprudential Regulation," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 2(2).
    9. Pal, Sumantra, 2018. "How to intervene in foreign exchange market without buying/selling dollars?," EconStor Preprints 181880, ZBW - Leibniz Information Centre for Economics.
    10. Jose Eduardo Gomez‐Gonzalez & Julian Andres Parra‐Polania & Mauricio Villamizar‐Villegas, 2021. "More than words: Foreign exchange intervention under imperfect credibility," Bulletin of Economic Research, Wiley Blackwell, vol. 73(4), pages 499-507, October.
    11. Nuttathum Chutasripanich & James Yetman, 2015. "Foreign exchange intervention: strategies and effectiveness," BIS Working Papers 499, Bank for International Settlements.
    12. Freddy A. Pinzón-Puerto & Mauricio Villamizar-Villegas, 2023. "Do Actions Speak Louder than Words? A Foreign Exchange Intervention Analysis," Borradores de Economia 1223, Banco de la Republica de Colombia.

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    More about this item

    Keywords

    Exchange rate; Central bank intervention; Currency dealers; Oligopoly;
    All these keywords.

    JEL classification:

    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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