Why do governments and central banks intervene in the foreign exchange markets? If markets are efficient,...

Why do governments and central banks intervene in the foreign exchange markets? If markets are efficient, why not let them determine the value of a currency?

Solutions

Expert Solution

Government and Central banks are often intervening into the foreign currency market because they want to protect the interest of their domestic currency shareholders as well as they also want to freeze their devaluation of their currency.

When Central banks fear that their domestic currency will fall against another currency they will often be selling those foreign currency into the domestic markets or they would be buying into domestic currency in order to to make it more valuable in comparison to the foreign currency.

These are operational intervention or this could even be jawboning in nature like Central Government can be more verbal and they can assure the markets to control the devaluation in currency and comfort them of taking some aggressive steps in order to restructure the currency markets.

Markets are never efficient because there are a lot of manipulation practices as well as there are a lot of insider trading informations and active investors can always beat the passive investment if there is appropriate management, so market efficiency is just theoretical concept.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

why and how do governments intervene in insurance markets

Explain why a central bank might want to intervene in the foreign exchange market to prevent...

Explain why a central bank might want to intervene in the foreign exchange market to prevent excessive appreciation of its currency, even if it previously stated that it will allow its currency to respond to supply and demand conditions in the foreign exchange market.

Why do consumers value insurance and why and how do governments intervene in insurance markets? What...

Why do consumers value insurance and why and how do governments intervene in insurance markets? What are the benefits of government intervention?

Governments sometimes intervene in insurance markets. Explain in detail two reasons why they might intervene and...

Governments sometimes intervene in insurance markets. Explain in detail two reasons why they might intervene and outline the rationale and justification for doing so.

Governments sometimes intervene in insurance markets. Explain in detail two reasons why they might intervene and...

Governments sometimes intervene in insurance markets. Explain in detail two reasons why they might intervene and outline the rationale and justification for doing so. (20 marks, approximately 300 words please).

why do governments intervene in health care services?

3. Why do central banks use monetary policy? What kind of monetary policy do central banks...

3. Why do central banks use monetary policy? What kind of monetary policy do central banks take when an economy is in recession? Name any two tools/activities by central banks to exercise the policy. How do these tools/activities help? Why don’t they always do that?

Why do forward markets for foreign exchange exist? Explain how they allow firms to hedge (eliminate)...

Why do forward markets for foreign exchange exist? Explain how they allow firms to hedge (eliminate) their exposure to foreign-exchange risk.

Question 2 – Government Intervention as Natural Monopoly Regulation Sometimes governments intervene with the markets; the...

Question 2 – Government Intervention as Natural Monopoly Regulation Sometimes governments intervene with the markets; the reason for the intervention might be a concern about allocative efficiency, or production inefficiency or some “fairness” issue. Your task here is to explain the motivation for government allowing only a single firm in naturally monopolistic industries and yet later regulating the price of this firm. Analyze the situation before and after government intervention, and then conclude by referring to the possible reason for...

Compare operations of foreign exchange markets to domestic markets. Explain how foreign exchange rates, economic conditions,...

Compare operations of foreign exchange markets to domestic markets. Explain how foreign exchange rates, economic conditions, and the international business environment affect prices charged in foreign markets. Support your analysis with a current news source, such as electronic local newspapers, New York Times, International Business Times, Economic Times, or CNN News.

Subjects