Central bank interventions and foreign exchange rate volatility 01291 Essay

Central bank interventions and foreign exchange rate volatility 01291 - Essay Example Some researchers are on the opinion that such intervention policies are ineffective and may lead to increase the degree of foreign exchange volatility whereas other academic intellectuals sighted that central bank volatility can become the potential reason behind reducing exchange rate volatility. Another consensus views central bank intervention as ineffective and a waste of taxpayers’ money. In this paper the effect of central bank intervention, exchange rate regimes and currency risk hedging decisions will be analysed in order to evaluate whether the central bank intervention impacts positively on the level of volatility of foreign exchange rate or not. Central bank intervention has always been a controversial policy among all researchers across world. According to a report from Wall Street Journal, central bank intervention is not only futile to manage exchange rate but also perilous as it may increase volatility of exchange rate. However, it is also evident that in some cases such intervention has a positive or limited effect of such volatility as well (Suranovic, 2004). During the period of Bretton Woods Exchange Rate System, central bank intervention had become necessary each time the exchange rates surpasses their parity bands. In 1973, after the dissolution of this exchange rate system, the intervention policy became country specific. In 1977, International Monetary Fund (IMF) formulated three distinct guidelines for its member countries to bring uniformity in the intervention practices. First, countries were not authorized to manipulate exchange rate for adjusting their Balance of Payment (BOP) or for gaining any discriminat ory competitive advantages. Secondly, countries were legitimated to intervene only for countering the disorderly market conditions and finally, countries were directed to always take into account the exchange rate interests of other