CIAO DATE: 05/2013
March 2013
Peterson Institute for International Economics
Official purchases of foreign assets—a broad definition of currency intervention—are strongly correlated with current account (trade) imbalances. Causality runs in both directions, but statistical analysis using instrumental variables reveals that the effect of official asset purchases on current accounts is very large. A country's current account balance increases between 60 and 100 cents for each dollar spent on intervention. This is a much larger effect than is widely assumed. These results raise serious questions about the efficiency of international financial markets.
Resource link: The Elephant Hiding in the Room: Currency Intervention and Trade Imbalances [PDF]