Foreign exchange intervention and currency crisis

Abstract

This paper offers an analysis on the effectiveness of foreign exchange interventions during pre-crisis period in Korea. I review how central bank intervention influence the path exchange rates can take. During pre-crisis period many factors contributed on the excessive foreign exchange rate movements. And those factors also made the central bank intervention less effective than normal period. Especially due to the weak banking system and business sector at the time, central bank spent large amount of foreign reserves through interventions and liquidity supports to them. Under the more opened capital market conditions, the monetary authorities need to stabilize the macroeconomic conditions and to build its own credibility in the decision making process rather than frequent interventions.