It is sometimes argued that the measured profitability of intervention should be one factor in assessing whether intervention has exerted a stabilising influence in exchange markets. This idea stems from the everyday proposition that speculators make money by buying cheap in order to sell dear in the future, and by doing so tend to equalise prices through time. If, then, there is a shortage of private speculation, governments might make money and stabilise the exchange rate by intervention in the exchange market, provided they have a good idea of its future path. This article:
- considers the circumstances in which this appealingly simple proposition might be valid;
- suggests that the notion of stability needs to be defined with care-a constant nominal exchange rate may not be the most appropriate standard against which to measure instability;
- investigates the likely consequences for profitability and stability of 'leaning into the wind: an intervention strategy used by the authorities in a number of countries.
It has been suggested that the authorities in major countries have made losses on their intervention in recent years. This article:
- presents some illustrative calculations for the United Kingdom, which tend to suggest that profits have been made; but
- points to the difficulty of arriving at a satisfactory measure of the profitability of intervention.
It concludes that profitability is unlikely to be a useful measure of the success of intervention.