The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. Federal Reserve Bank of St. Louis Working Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to Federal Reserve Bank of St. Louis Working Papers (other than an acknowledgment that the writer has had access to unpublished material) should be cleared with the author or authors. Photo courtesy of The Gateway Arch, St. Louis, MO. www.gatewayarch.com

w o r k i n g

here has been a long and voluminous literature about official intervention in foreign exchange markets. Official intervention is generally defined as those foreign exchange transactions of monetary authorities that are designed to influence exchange rates, but can more broadly refer to other policies for that purpose. Many papers have explored the determinants and efficacy of intervention (Edison, 1993; Sarno and Taylor, 2000) but very little attention has been paid to the more pedestrian subject of the mechanics of foreign exchange intervention like choice of markets, types of counterparties, timing of intervention during the day, purpose of secrecy, etc. This article focuses on the latter topics by reviewing the motivation for, methods, and mechanics of intervention. Although there apparently has been a decline in the frequency of intervention by the major central banks, reports of a coordinated G-7 intervention to support the euro on September 22, 2000, remind us that intervention remains an active policy instrument in some circumstances. The second section of the article reviews foreign exchange intervention and describes several methods by which it can be conducted. The third section presents evidence from 22 responses to a survey on intervention practices sent to monetary authorities. TYPES OF INTERVENTION

Sterilized foreign exchange market interventions are commonly dismissed by economists as an ineffective policy instrument. Nevertheless many central banks operating under independently floating exchange rates regimes are often engaged in sales and purchases of foreign exchange in order to manipulate the current value of their currencies. In this paper we argue that the skepticism of many economists can be ascribed to their orientation on fundamental-based, efficient-market exchange rate models. Given their weak empirical support, however, it is unreasonable to evaluate the effectiveness of sterilized foreign exchange interventions against the background of this class of models. Therefore, the purpose of this paper is to investigate the effectiveness of sterilized foreign exchange market interventions on the basis of a more suitable model. Using a chartist-fundamentalist model we show that central banks can influence exchange rates by using sterilized interventions. In particular, turning points occur earlier and exchange

thanks Michael Leahy for a helpful discussion of the Merton and Henriksson tests and William Osterberg and an anonymous referee for their comments on the initial draft.

Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views stated herein are those of the author and are not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal

The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. Federal Reserve Bank of St. Louis Working Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to Federal Reserve Bank of St. Louis Working Papers (other than an acknowledgment that the writer has had access to unpublished material) should be