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Intervention Can Temporarily Smooth Exchange Rate Fluctuations

While United States government interventions in the foreign exchange market have no long-term effect on exchange rates, they can sometimes smooth out short-term fluctuations in rates, according to a Federal Reserve Bank of Cleveland Economic Commentary.

The Commentary's author, Economic Advisor Owen Humpage, studied the effectiveness of U.S. government sales and purchases of Japanese yen and German marks for a three-year period beginning in 1987. After accounting for normal day-to-day fluctuations in the exchange market, Humpage concludes that the United States was fairly successful at smoothing near-term exchange-rate movements over the sample period.

Humpage notes, however, that the fundamental factor affecting exchange rates is the difference in countries' rates of money growth. Since money growth is a function of monetary policy, Humpage cautions that the United Sates cannot pursue an exchange-rate objective independent of monetary policy. Press releases and research articles can also be found on the Federal Reserve Bank of Cleveland's Internet site (www.clev.frb.org).

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