ABSTRACT
On August 15, 1971, the United States suspended the convertibility of the dollar into gold. The dollar was then formally devalued twice, in 1972 and 1973, and began to float in 1973. The flexible exchange rate regime was coupled with successive capital decontrols across states, shrinking policy autonomy and the emergence of global financial integration (Frieden, 1991; Andrews, 1994; Cohen, 1996). The effects of domestic macroeconomic policies were transmitted across state borders, and policymakers scrambled for new policy tools to handle the monstrous speculation and frequent capital movements that can nullify macroeconomic policy measures. Under these circumstances, foreign exchange rate policy interventions have become one of the most important policy instruments available for external adjustment and for stabilizing the international monetary system (Frieden, 1991). In addition, foreign exchange interventions may also affect domestic monetary policy.1 Recent econometric analysis (Dominguez and Frankel, 1993a, 1993b; Dominguez, 1993) has verified the effectiveness of foreign exchange market intervention as an independent policy instrument.
