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Foreign exchange markets, intervention and exchange rate regimes

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

Abstract

While macroeconomic fundamentals determine the exchange rate at long horizons, there are substantial and persistent deviations from these fundamentals. The market microstructure within which they operate, macroeconomic fundamentals, and policies all affect foreign exchange (FX) markets. The paper describes the institutional features of these markets, with special emphasis on the process of liberalization and deepening in Indian FX markets, in the context of global integration. Since the mechanics of FX trading affect exchange rates, they have implications for the appropriate exchange rate regime. First, bounds on the volatility of the exchange rate can lower noise trading in FX markets decrease variance, improve fundamentals and give more monetary policy autonomy. Second, the speculative demand curve is well behaved under strategic interaction between differentially informed speculators and the Central Bank (CB) when there is greater uncertainty about fundamentals as in emerging markets. So a diffuse target and strategic revelation of selected information can be expected to be effective. Analysis of Indian experience confirms these research results. CB actions, including intervention and signaling, have major effects.

Suggested Citation

  • Ashima Goyal, 2015. "Foreign exchange markets, intervention and exchange rate regimes," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2015-011, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2015-011
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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2015-011.pdf
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    References listed on IDEAS

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    1. Ashima Goyal, 2006. "Exchange Rate Regimes: Middling Through," Global Economic Review, Taylor & Francis Journals, vol. 35(2), pages 153-175.
    2. Michael J. Sager & Mark P. Taylor, 2006. "Under the microscope: the structure of the foreign exchange market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(1), pages 81-95.
    3. Guonan Ma & Corrinne Ho & Robert N McCauley, 2004. "The markets for non-deliverable forwards in Asian currencies," BIS Quarterly Review, Bank for International Settlements, June.
    4. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2001. "Hedging and financial fragility in fixed exchange rate regimes," European Economic Review, Elsevier, vol. 45(7), pages 1151-1193.
    5. Harendra Kumar Behera, 2011. "Onshore and offshore market for Indian rupee: recent evidence on volatility and shock spillover," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 4(1), pages 43-55.
    6. Hart, Oliver D & Kreps, David M, 1986. "Price Destabilizing Speculation," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 927-952, October.
    7. Olivier Jeanne & Andrew K. Rose, 2002. "Noise Trading and Exchange Rate Regimes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 537-569.
    8. Goyal, Ashima & Arora, Sanchit, 2012. "The Indian exchange rate and Central Bank action: An EGARCH analysis," Journal of Asian Economics, Elsevier, vol. 23(1), pages 60-72.
    9. Ashima Goyal, 2009. "Monetary Policy, Forex Markets and Feedback Under Uncertainity in an Opening Economy," Working Papers id:2208, eSocialSciences.
    10. Maendra Dev, S., 2015. "India Development Report 2015," OUP Catalogue, Oxford University Press, number 9780199459452.
    11. Ashima Goyal, 2014. "External shocks," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2014-046, Indira Gandhi Institute of Development Research, Mumbai, India.
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    Cited by:

    1. Ashima Goyal, 2017. "Intervention And Signaling: Interaction Between Central Banks And Fx Markets In An Emerging Market," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 62(01), pages 193-225, March.

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    More about this item

    Keywords

    Foreign exchange markets; intervention; information; exchange rate bounds;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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