ABSTRACT
US interventions in the foreign exchange market have become increasingly rare. This chapter offers an explanation for the reluctance to intervene. The apparent frequency with which US interventions have stabilized key dollar exchange rates seems attributable primarily to the random-walk nature of movements in these rates. The chapter offers a definition of a successful intervention and asks if exchange rate movements consistent with this definition occur more frequently when the United States intervenes. Economists’ doubts about the effectiveness of US intervention originate with the Federal Reserve’s practice of preventing official exchange-market transactions from interfering with monetary policy. The random-walk nature of exchange rate movements—rather than superior information—seems capable of explaining the frequency of success. Owen F. Humpage found that coordination—and, to a lesser extent, large dollar amounts—increased the probability of an intervention’s success. Despite these shortcomings, the results offer a plausible reason for not expecting more from less intervention.
