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The other day I realized how much the Fed's attempts to resolve the financial mess resemble sterilized foreign exchange intervention.
In recent years concerted foreign exchange intervention, of the sort undertaken by the G-7 in 1985 and periodically over the subsequent decade, has died out.
"There may be no alternative to raising interest rates, allowing greater flexibility in exchange rates and reducing reliance on foreign exchange intervention," the report said.
As the correspondent said, however, the euro can be seen as a de facto foreign exchange intervention to keep the de facto Deutsche mark weak.
But the risk is that such measures might escalate in the longer term, he added, while more foreign exchange intervention is likely.
This paper examines the welfare implications of foreign exchange intervention in a two-country, two-currency, general equilibrium model with limited participation in financial markets and cash-in-advance constraints on transactions.
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Part 3: international finance policy, capital controls and foreign exchange interventions.
The welfare effects of shocks to monetary policy, sterilized and nonsterilized foreign exchange interventions are examined and compared.
Many experts think the foreign exchange interventions of the last two years have maintained the dollar's value at an unnaturally high level.
Despite the central bank's declarations that it has reduced its foreign exchange interventions, currency dealers say they still spot aggressive buying or selling of dollars by the authorities.
But in a speech in December, Jean-Pierre Danthine, a governing board member, said that foreign exchange interventions had pushed up the bank's foreign exchange reserves to more than 200 billion francs, or $207 billion, from 140 billion francs at the end of 2009.
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