chapter  7
20 Pages

A Model for the Analysis of Official Intervention in the Foreign Exchange Markets

WithGiorgio Basevi

This chapter provides a framework for analysing the internal monetary effects of surpluses and deficits in the balance of a country's international payments. It examines a framework for analysing the foreign exchange market in all its sections; mainly those determining the spot and forward rates, but in principle also those determining the rates for various maturities of forward exchange contracts. The chapter presents a framework for analysing the policies of the monetary authorities aiming at controlling the money supply while at the same time maintaining external equilibrium through intervention on the spot and forward sections of the foreign exchange market. The analysis of the foreign exchange market is based on the distinction of the essential functions that may be performed on it, rather than on that of the operators that perform these functions. The model is framed so as to allow analysis of the joint use of monetary policy and forward exchange policy.