%0 Journal Article
%T Perverse Effects of Non
%A Ismail Saglam
%J South Asian Journal of Macroeconomics and Public Finance
%@ 2321-0273
%D 2019
%R 10.1177/2277978719836307
%X We study the effects of non-sterilized intervention on a spot foreign exchange (forex) rate using a multi-period game-theoretical model which involves an unspeci£¿ed number of competitive traders, a £¿nite number of strategic traders (forex dealers) with heterogenous initial money balances, and the central bank of the home country. Simulating the subgame-perfect Nash equilibrium of the two-stage game played by the forex dealers in each period, we show that the non-sterilized intervention of the central bank may lead to a perverse effect on the spot forex rate. We call the mechanism underlying this effect strategic trade switching channel that works when an increase in the central bank¡¯s forex currency demand (supply) exerts such a big upward (downward) effect on the forex rate that some sufficiently big dealers, who optimally bought (sold) forex currency in the previous period when the forex rate was sufficiently low, £¿nd in the current period selling (buying) it more pro£¿table, thus moving the forex rate in a direction undesired by the central bank. JEL Classi£¿cation: D43, F31, G2
%K Exchange rate
%K central bank intervention
%K foreign exchange dealers
%K imperfect competition
%U https://journals.sagepub.com/doi/full/10.1177/2277978719836307