Arnold Kling  

Two Links

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1. File this story under "collapsing center watch." (Yesterday, I linked to my response to a NYT question about the state of the economy. In that response, I changed the subject in order to mention my view that the political center has collapsed.)

2. File this story under "portfolio balance model fails again." The story describes Switzerland, Japan, and Brazil as having each attempted and failed to weaken its currency. One theory of how central banks affect things is that they disturb "portfolio balance" and people respond. So if you increase the supply of Swiss Francs relative to euros, you disturb portfolio balance until the value of the Franc falls. Doesn't seem to have worked.

Of course, even without the portfolio balance model, it is natural to assume that a central bank can devalue its currency if it really wants to. I don't claim to be able to explain how Switzerland, Japan, and Brazil could have failed to achieve this objective.



COMMENTS (2 to date)
Steven writes:

Portfolio balance theory looks a lot better than you give it credit for. The story you linked to fails to mention that all three currency interventions were sterilized - central banks offset the sale of domestic currency by selling domestic bonds. The net effect on the portfolio held by the public is to reduce the quantity of foreign currency, increase the quantity of domestic bonds, and have no net effect on the quantity of domestic currency. Portfolio balance theory predicts minimal effects on the price of domestic currency, which is what happened.

Links talking about sterilization in the three interventions discussed in the linked article:

Switzerland: http://www.scribd.com/JP-Morgan-Lessons-from-SNB-Currency-Intervention/d/34723707

Japan: http://business.financialpost.com/2010/09/16/japans-unsterilized-yen-intervention-raises-odds-of-success/

(This link talks about sterilization in the 2004 intervention - your article talks about Japan's interventions 1977-2007 without narrowing it any further).

Brazil: http://www.globalpost.com/webblog/commerce/brazils-brand-new-bag-swf-currency-intervention


Torben writes:

Maybe a statement issued by the central bank that it is willing to weaken its curerncy works against this objective, since it is at the same time an official acknowledgement that the currency is "safter/more stable" compared to other currencies.

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