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Foreign Exchange Interventions:International Experience

Intervention by a Central Bank, in a broad sense, is defined as an official purchases and sales of foreign exchange in order to achieve one or more of the following objectives. For example, moderating exchange rate fluctuations and correcting misalignment; addressing sharp fluctuations in the exchange rate, high exchange rate volatility, wide bid-offer spreads relative to tranquil periods, sudden changes in foreign exchange market turnover, accumulating foreign exchange reserves and supplying foreign exchange to the market. Intervention in a narrow sense implies central bank foreign exchange operations when targeting exchange rate movements.
There are still debates in the modern economic society about how effective/desirable is intervention (as one of the instrument of the monetary policy) in the foreign exchange to achieve the above-mentioned objectives. It is widely agreed that in case of floating exchange rate regime, intervention is less effective/desirable when exchange rate misalignment stems from the macroeconomic fundamentals (when adverse exchange rate movements reflect persistent macroeconomic imbalances and not the changes in investor confidence). Therefore, it can be used only for smoothing such short-term exchange rate volatility, which could trigger destabilization in financial markets.
Against this background, it is worth to pay attention to the Articles of Agreement with members of the International Monetary Fund, especially one of the leading sections that sets forth key approaches, which must be taken into account while carrying out the exchange rate policy. Some of the obligations are of "soft" nature - requiring efforts rather than the achievement of results (Article IV of the Fund's Articles of Agreement: An Overview of the Legal Framework. 2006 IMF., p. 22) and the other are of "hard" nature - obligation expressed in terms of achieving results, not merely "endeavoring" or "seeking" to achieve results (Ibid., p. 16)). In particular, a specific obligation under Article IV, Section 1 is the requirement that members should "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage." The member country is deemed to have had manipulated the exchange rate, if the Fund acknowledges that the objective of the underlying exchange arrangement is the alignment of the exchange rate towards depreciation and results increase in net export. Moreover, the Article includes the recognition that a member should not resist an adjustment to its exchange rate if such an adjustment is needed in response to underlying conditions (to correct a "fundamental disequilibrium"), which could be characterized with short-term unfavorable changes.

As noted above, in the economic literature there is a variety of viewpoints concerning the choice of instruments and their effectiveness/desirability when dealing with exchange rate movements.  (Read complete document in Georgian)