Abstract

This paper traces out recent developments in modeling foreign exchange market intervention. The central question is whether and how intervention is able to influence the course of the exchange rate. The channels of influence of unsterilized and sterilized intervention in some well-established models of exchange rate determination are set out. Furthermore, the mechanics of foreign exchange market intervention in some recent studies are analysed. These studies adhere to the assumption that the foreign exchange market is efficient in the sense that market participants use some structural model as a yardstick when taking positions on the foreign exchange market. Finally, some alternative approaches to the study of foreign exchange intervention are discussed. The latter approaches drop the assumption that the foreign exchange market is efficient.