Foreign Exchange Intervention in Developing and Transition Economies

Based on evidence obtained from the IMF''s 2001 Survey on Foreign Exchange Market Organization, the author argues that, for several reasons, some central banks in developing and transition economies may be able to conduct foreign exchange intervention more effectively than the central banks of developed countries issuing the major international currencies. First, these central banks do not always fully sterilize their foreign exchange interventions. In addition, they issue regulations and conduct their foreign exchange operations in a way that increases the central bank''s information advantage and the size of their foreign exchange intervention relative to foreign exchange market turnover. Some of the central banks also use moral suasion to support their foreign exchange interventions.Exchange restrictions;Exchange rate stability;foreign exchange, exchange rate, foreign exchange intervention, foreign exchange market, exchange rate regime, exchange rate regimes, exchange rates, market access, exchange rate regime classification, de facto exchange rate regime, foreign currency, foreign exchange interventions, foreign exchange positions, exchange markets, foreign exchange markets, foreign exchange transactions, exchange transactions, exchange operations, floating exchange rate, foreign exchange operations, exchange rate volatility, exchange sales, floating exchange rate regimes, foreign exchange sales, currency boards, flexible exchange rate, foreign currencies, flexible exchange rate regimes, foreign exchange position, exchange rate policies, exchange purchases, exchange rate expectations, foreign exchange purchases, exchange rate risk, currency depreciation, exchange controls, foreign exchange controls, exchange auctions, fixed exchange rate, foreign exchange auctions, exchange arrangements, currency substitution, exchange rate pressures, fixed exchange rate regime, international settlements, floating exchange rate regime, exchange market intervention, exchange rate determination, exchange rate dynamics, foreign bonds, exchange market activity, foreign exchange risk, foreign exchange earnings, optimal exchange rate regime, exchange risk, exchange rate fluctuations, exchange rate developments, exchange rate policy, spot exchange rates, exchange rate data, exchange earnings, currency appreciation, market structures, flexible exchange rates, macroeconomic stability, exchange rate path, fixed exchange rate regimes

Foreign Exchange Market Organization in Selected Developing and Transition Economies

The foreign exchange market microstructures in developing and transition economies are characterized by the results from the IMF''s 2001 Survey on Foreign Exchange Market Organization. The survey found that these markets are usually unified onshore spot markets for U.S. dollars, where transactions are concentrated at the bank-customer level. The trading mechanisms are usually dealer or mixed dealer/auction markets; the degree of transparency is often low; settlement systems remain risky; and the scope for price discovery is variable.Developing countries;Transition economies;foreign exchange, foreign exchange market, exchange rate, exchange markets, foreign exchange markets, exchange rates, exchange rate regimes, exchange rate regime, foreign exchange auctions, exchange auctions, foreign exchange transactions, exchange transactions, interbank market, exchange rate regime classification, exchange rate risk, de facto exchange rate regime, floating exchange rate regimes, floating exchange rate, exchange rate volatility, settlement risk, currency exchange, foreign exchange operations, prudential regulation, flexible exchange rate regimes, flexible exchange rate, exchange rate flexibility, bank accounts, exchange operations, banking, exchange restrictions, multiple currency practices, bank customer, exchange rate pressures, limited exchange rate flexibility, bank of international settlements, currency substitution, currency boards, exchange rate fluctuations, currency transactions, capital mobility, banking system, currency depreciation, working capital, exchange arrangements, exchange rate arrangements, prevailing exchange rates, bank of international settlements (bis), bank of thailand, exchange rate dynamics, currency appreciation, determinant of exchange rate, exchange options, exchange market activity, excess demand, foreign exchange risk, bank runs, bank account, import bank, exchange risk, correspondent bank, exchange rate adjustment, bank management, bank vault, exchange rate adjustments, exchange rate determination, floating exchange rates, multiple exchange rate, exchange rate classification, prevailing exchange rate, exchange controls, segmentation, exchange rate risks, history of exchange rate

Structural Factors Affecting Exchange Rate Volatility

The paper examines factors affecting exchange rate volatility, with an emphasis on structural features of the foreign exchange regime. It draws for the first time on detailed survey data collected by the IMF on foreign exchange market organization and regulations. Key findings are that decentralized dealer markets, regulations on the use of domestic currency by nonresidents, acceptance of Article VIII obligations, and limits on banks'' foreign exchange positions are associated with lower exchange rate volatility. The paper also provides support for earlier results on the influence of macroeconomic conditions and the choice of exchange rate regime on volatility.Structural adjustment;Exchange rates;foreign exchange, exchange rate, exchange rate volatility, foreign exchange market, exchange rate regimes, exchange rate regime, exchange restrictions, nominal effective exchange rate, real exchange rate, exchange markets, effective exchange rate, foreign exchange markets, real exchange rate volatility, multiple currency practices, daily exchange rate, flexible exchange rate regimes, capital flows, foreign exchange operations, prevailing exchange rate, exchange operations, international trade, nominal exchange rates, nominal exchange rate, flexible exchange rate, foreign exchange transactions, volatile exchange rates, basket of currencies, exchange rate fluctuations, exchange rate movements, exchange rate behavior, international financial statistics, exchange arrangements, exchange transactions, exchange rate policy, exchange reserves, exchange rate arrangements, floating exchange rates, international finance, international financial

Financial Integration in Central America

We assess the current barriers to trade in financial services in the six Central American countries seeking a free trade agreement with the United States (the CAFTA) and examine the relative merits of regional and multilateral liberalization. Even though there are few formal barriers, deficiencies in regulatory and competition standards and in the judicial systems still restrict the participation of foreign institutions in the financial systems in the region. A greater presence of such institutions could support other objectives of trade and investment liberalization, though it would require several adjustments in prudential supervision at national levels and greater cooperation between members of the CAFTA.

Official Intervention in the Foreign Exchange Market

This paper offers guidance on the operational aspects of official intervention in the foreign exchange market, particularly in developing countries with flexible exchange rate regimes. A brief survey of the literature and country experience is followed by an analysis of the objectives, timing, amount, degree of transparency, and choice of markets and counterparties in conducting intervention. The analysis highlights the difficulty of detecting exchange rate misalignments and disorderly markets, and argues in favor of parsimony in official intervention. Determining the timing and amount of intervention is a highly subjective excercise, and some degree of discretion is almost necessary, though policy rules may serve as "rules of thumb."Intervention;exchange rate, central bank, foreign exchange, central banks, foreign exchange market, exchange rates, exchange rate volatility, reserve bank, foreign exchange operations, exchange operations, exchange rate regimes, flexible exchange rate, reserve accumulation, exchange markets, foreign exchange markets, exchange controls, balance of payments, flexible exchange rate regimes, exchange rate policy, domestic currency, exchange rate policies, exchange rate regime, external liquidity, exchange rate misalignment, exchange rate expectations, exchange rate movements, currency debt, foreign exchange swaps, exchange rate fluctuations, exchange rate level, exchange purchases, foreign exchange purchases, exchange swaps, exchange arrangements, foreign exchange controls, foreign exchange reserves, foreign currency debt, exchange rate target, exchange rate pressures, floating exchange rate, exchange market exchange rate misalignments, exchange rate changes, exchange reserves, exchange rate risk, exchange rate flexibility, exchange rate determination, currency composition, real exchange rate, currency markets, external borrowing, exchange rate overvaluation, exchange rate levels, repayment capacity, exchange restrictions, exchange rate adjustment, currency appreciation, currency crisis, flexible exchange rate regime, floating exchange rate regimes, exchange rate depreciation, currency crises, spot exchange rate, foreign exchange transactions, foreign currency debts, real exchange rate overvaluation, currency basket, foreign exchange auctions, floating exchange rate regime, short-term debt, exchange rate currency sales, real effective exchange rates, exchange transactions, exchange rate dynamics, effective exchange rate, exchange rate guarantee, currency debts, surveillance over exchange rate policies, effective exchange rates, undervalued exchange rate, external shocks, equilibrium exchange rate, public sector debt, exchange rate volatilities, exchange rate arrangements, currency exchange, exchange auctions, real effective exchange rate, multiple exchange rate, currency exchange rates, exchange rate instability, exchange rate need, exchange rate risks, implicit exchange rate guarantee, exchange rate losses, currency depreciation, exchange rate management, reserve currencies, current account, exchange sales, flexible exchange rates, repayment capacities, foreign exchange earnings, foreign exchange sales, exchange earnings

Setting the Operational Framework for Producing Inflation Forecasts

How should a central bank organize itself to produce the best possible inflation forecast? This paper discusses elements for building a comprehensive platform for an inflation forecasting framework. It describes the exercise of forecasting inflation as a production process, which induces a strict discipline concerning data management, information gathering, the use of a suitable statistical apparatus, and the exercise of sound communication strategies to reinforce reputation and credibility. It becomes critical how a central bank organizes itself to produce relevant macroeconomic forecasts, with special consideration to product design, the essential requirements needed in the forecasting process, and key related organizational issues. In addition, the paper proposes to factor into the process the authorities'' policy responses to previous inflation forecasts in order to be consistent with the spirit of the inflation targeting framework.Central bank organization;Inflation targeting;Central bank policy;Data collection;Data analysis;Forecasting models;inflation, monetary policy, central bank, inflation forecasts, long-term interest rates, terms of trade, forecasting inflation, inflation target, monetary fund, monetary aggregates, inflation targeting framework, monetary transmission, inflationary pressures, monetary policy decisions, aggregate demand, inflationary expectations, monetary transmission mechanism, monetary policy framework, measure of inflation, real interest rates, monetary authority, national bank, monetary policy reaction function, monetary economics, monetary targeting, inflation process, monetary policy rules, monetary base, inflation objective, money demand, relative prices, monetary decisions, wage inflation, low inflation, monetary policy strategy, monetary framework, monetary policy decision, price stability, monetary control, monetary disturbances, inflation targeting regime, monetary regime, monetary factors, inflation data, inflation dynamics

Official Foreign Exchange Intervention

Despite increasing exchange rate flexibility, central banks in emerging markets still intervene in their foreign exchange markets for several reasons. In doing so, they face many operational questions, including on the degree of transparency and the choice of markets and counterparties. This paper identifies elements of best practice in official foreign exchange intervention, presents survey evidence on intervention practices in developing countries, and assesses the effectiveness of intervention in Mexico and Turkey.

Capital Controls

This paper examines country experiences with the use and liberalization of capital controls to develop a deeper understanding of the role of capital controls in coping with volatile capital flows, as well as the issues surrounding their liberalization. Detailed analyses of country cases aim to shed light on the motivations to limit capital flows; the role the controls may have played in coping with particular situations, including in financial crises and in limiting short-term inflows; the nature and design of the controls; and their effectivenes and potential costs. The paper also examines the link between prudential policies and capital controls and illstrates the ways in which better prudential practices and accelerated financial reforms could address the risks in cross-border capital transactions.