GOVERNMENT INTERVENTION

PRESENTED BY:

Maryam Munir
Asim Abbasi
Samiya Sattar
Momina Arshad
GOVERNMENT INTERVENTION

 Each country has a central bank that may intervene in the foreign
exchange market to control it’s currency’s value.

 A central bank may also attempt to control the money supply growth in it’s
country.

 In the united states the Federal reserve system (fed) is the central bank.
Reasons for Government Intervention
The following are the reasons for govt. intervention:

 Smoothing exchange rate movements:

If a central bank is concerned that its economy will be affected by abrupt
movements in its home currency’s value, it may attempt to smooth the currency
movements over time.
 Establishing implicit exchange rate boundaries:
Some central banks attempt to maintain their home currency rates within
some unofficial, or implicit, boundaries.

 Responding to temporary disturbances:

A central bank may intervene to protect a currency’s value from a temporary
disturbance
DIRECT INTERVENTION

 Direct intervention refers to the exchange of currencies that the central

bank holds as reserves for other currencies in the foreign exchange market.

 Direct intervention is usually most effective when there is a coordinated

effort among central banks and when the central banks have high levels of
reserves that they can use.
 Reliance on Reserves:
The potential effectiveness of a central bank’s direct intervention is the
amount of reserve it can use.

 Frequency of Intervention:
Number of direct interventions has declined from 97 different days in 1989 to
no more than 20 days in a year.
 Coordinated Intervention:
Intervention more likely to be effective when it is coordinated by several central
banks.

 Sterilized vs Non-sterilized Intervention:

When a central bank intervenes in the foreign exchange market without adjusting
for the change in money supply, it is said to engage in non sterilized intervention.

In a sterilized intervention, treasury securities are purchased or sold at the same

time to maintain the money supply.
 Speculating on Direct Intervention:
Some speculators attempt to determine when the central bank is intervening
directly, and the extent of the intervention, in order to capitalize on the
anticipated results of the intervention effort.
INDIRECT INTERVENTION

Central banks can also engage in indirect intervention by influencing the

factors that determine the value of a currency.
These factors are;
 Inflation,
 interest rates,
 income level,
 government controls,
 Expectations.
The central bank is likely to focus on interest rates or Govt. controls when using
indirect intervention.
 Government control of interest rates:
For example, the Fed may attempt to increase interest rates (and hence boost
the dollar’s value) by reducing the U.S. money supply.
 Govt. use of foreign exchange controls:
Some governments have also used foreign exchange controls (such as
restrictions on currency exchange) as a form of indirect intervention.
 Intervention warnings:
Intention warnings intended to warn speculators. The announcements could
discourage additional speculations and might even encourage some
speculators to unwind (liquidate) their existing position in the currency.
INTERVENTION AS A POLICY TOOL

 Influence of a weak home currency:

A weak home currency can stimulate foreign demand for products, and
hence reduce unemployment at home. However, it can also lead to higher
inflation.
 Influence of a strong home currency:
A strong currency may cure high inflation, since it intensifies foreign
competition and forces domestic producers to refrain from increasing prices.
However, it may also lead to higher unemployment