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Non-Sterilized Interventions May Yield Perverse Effects on Spot Foreign Exchange Rates

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  • Saglam, Ismail

Abstract

We study the effects of non-sterilized intervention on a spot foreign exchange rate using a multi-period game-theoretical model which involves an unspecified number of competitive traders, a finite number of strategic traders (forex dealers), and the central bank of the home country. Simulating the subgame-perfect Nash equilibrium of the two-stage game played by the strategic traders in each period, we show that the non-sterilized intervention of the central bank may lead to a perverse result. This result may arise when the intervention becomes strong enough to unintentionally induce some of the strategic traders -who have previously traded in the direction desired by the monetary authority- to optimally switch to the opposite trade direction.

Suggested Citation

  • Saglam, Ismail, 2017. "Non-Sterilized Interventions May Yield Perverse Effects on Spot Foreign Exchange Rates," MPRA Paper 78284, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:78284
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Exchange rate; central bank intervention; foreign exchange dealers; imperfect competition;
    All these keywords.

    JEL classification:

    • 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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