First, abnormal exchange rate fluctuations are often inevitably related to international capital flows, which will lead to unnecessary fluctuations in industrial production and macroeconomic development. Therefore, stabilizing the exchange rate is helpful to stabilize the national economy and prices. At present, the cross-border flow of international capital is not only large in scale, but also has many channels and few artificial obstacles. Industrial countries began to relax financial supervision in the late 1970s, which further promoted international capital flows. Under the condition of floating exchange rate system, the most direct result of large-scale international capital flow is the price fluctuation in the foreign exchange market. If a large amount of capital flows into Germany, the exchange rate of the German mark will rise in the foreign exchange market, while if a large amount of capital flows out of the United States, the exchange rate of the US dollar will inevitably fall in the foreign exchange market. On the other hand, if people expect the exchange rate of a country's currency to rise, capital will inevitably flow to that country. The relative change of capital flow and the change of foreign exchange market have an important influence on a country's national economy, industrial layout and price. For example, when a country's capital outflow leads to a decline in its currency exchange rate, or when people expect its currency exchange rate to fall, leading to capital outflow, the country's industrial allocation and prices will inevitably change in favor of those industries linked to foreign trade. From the perspective of foreign trade, any country's industries can be divided into two types: those that can conduct foreign trade and those that cannot. The former, such as manufacturing, can export and import products, while the latter, such as some service industries, must be produced and consumed locally. When capital flows out and the currency depreciates, the prices of industrial sectors that can conduct foreign trade will rise. If the wage growth rate of this department is not synchronized, it will be profitable to increase the production of this department and increase exports. But from the perspective of domestic industrial structure, capital will flow from non-trading industries to trading industries. If this is a long-term phenomenon, the proportion of the national economy in this country may be unbalanced. Therefore, neither industrial countries nor central banks want to see the exchange rate of their currencies deviate from their equilibrium prices for a long time. This is also one of the reasons why the central bank directly intervenes in the market when the country's currency continues to be weak or excessively strong. Another important influence of the correlation between capital flow and foreign exchange market changes on the national economy is that a large amount of capital outflow will increase the cost of producing capital in the country, while a large amount of capital inflow may cause unnecessary inflationary pressure and affect long-term capital investment. Since the early 1980s, the United States has implemented a tight monetary policy and an expanding fiscal policy, resulting in a large amount of capital inflows and a gradual rise in the exchange rate of the US dollar, while the Federal Reserve Bank of the United States has completely adopted a laissez-faire attitude towards the foreign exchange market from 198 1 to 1982. In order to prevent capital outflow, western European countries are often forced to directly intervene in the foreign exchange market when the exchange rate of European currencies keeps falling, and have repeatedly asked the US Federal Reserve to help intervene.
Second, the central bank directly intervenes in the foreign exchange market for the needs of domestic and foreign trade policies. The lower price of a country's currency in the foreign exchange market is bound to benefit the country's exports. The issue of going abroad has become a political issue in many industrial countries, involving the employment level of many export industries, protectionist sentiment, voters' attitude towards the government and many other aspects. No central bank wants to see its exports blocked by the high exchange rate of its own currency, nor does it want to see its foreign trade surplus caught by other countries because of the low exchange rate of its own currency. Therefore, the central bank's intervention in the foreign exchange market is mainly manifested in two aspects.
In order to protect exports, the central bank will directly intervene in the foreign exchange market when the country's currency continues to strengthen. This is especially true for those countries whose exports account for an important proportion in the national economy. Before April 1992, the Australian dollar was bullish all the way, and the gains were flat. However, when the exchange rate of the Australian dollar against the US dollar rose to 0.77 US dollars on March 30, the Australian central bank immediately threw the Australian dollar in the market to buy US dollars. For another example, Germany is a big exporter of manufacturing in the world. After the floating exchange rate system was implemented in 1970s, the mark exchange rate rose with the strength of German economy. In order to maintain the competitive position of its export industry in the world, the German government strongly advocates the implementation of the European monetary system, so as to keep the currencies of the mark in the same range as those of other European member States.
Judging from the development history of the international foreign exchange market, it is a common policy adopted by many countries in the early days to expand their business by using the depreciation of their own currencies. This is called beggar-thy-neighbor policy, which often leads to trade wars between the two countries during the economic downturn. Due to the various names of non-tariff trade barriers, this policy of artificial intervention in the foreign exchange market is rarely adopted, and it will obviously lead to accusations from other countries.
Third, the central bank intervened in the foreign exchange market in order to curb domestic inflation. The macroeconomic model proves that under the floating exchange rate system, if a country's currency exchange rate is lower than the equilibrium price for a long time, it will stimulate exports in a certain period of time, leading to a foreign trade surplus, but it will eventually lead to rising prices and wages in the country, resulting in inflationary pressure. When inflation is already high, this possible periodic rise in wages and prices will lead people to have high expectations for future inflation, thus making it difficult for monetary authorities to implement anti-inflation policies. In addition, in some industrial countries, voters often regard the inflationary pressure caused by the devaluation of their own currencies as a symbol of improper macroeconomic management by government authorities. Therefore, after the implementation of the floating exchange rate system, many industrial countries take the exchange rate of their own currencies as the content of close monitoring when controlling inflation. The fluctuation of pound since 1980s clearly shows the relationship between currency depreciation and inflation. In the 1970s, almost all countries were caught in double-digit inflation, and the pound was doomed. Throughout the 1980s, the central banks of the United States and western European countries took anti-inflation as the primary or important goal of monetary policy. America, Germany, etc. All of them have achieved obvious results, while the effect in Britain is very poor. 1979 after the establishment of the European monetary system, Britain was reluctant to join the European monetary system during Margaret Thatcher's administration because of political and other factors, and made great efforts to curb domestic inflation. 10 years later, 1990, Britain finally announced its participation in the European monetary system after Major became prime minister. The primary reason is to keep the exchange rate of the pound at a high level through the European monetary system, which further controls the inflation in Britain. However, the good times did not last long. 1992, the European monetary system was in crisis, and the foreign exchange market violently hit the pound and lira, which eventually led to the official depreciation of the Italian lira. Also based on anti-inflation considerations, the British government spent more than 6 billion US dollars to intervene in the market, and the German central bank also spent more than 654.38+0.2 billion US dollars to intervene in the foreign exchange market to maintain the value of the pound and lira. In the case that the pound continued to plummet and the voice of the devaluation of the pound in the European monetary system was very high, Britain announced that it would withdraw from the European monetary system and would never formally depreciate the pound, and announced that it would continue to implement the anti-inflation monetary policy. There is a more formal definition of what is the intervention of the central bank in the foreign exchange market. In the early 1980s, the exchange rate of the US dollar against the currencies of all European countries was rising. Focusing on whether industrial countries should intervene in the foreign exchange market,1In June 1982, the Versailles Industrial Summit decided to set up a "foreign exchange intervention working group" composed of official economists to study the foreign exchange market intervention. 1983, the group published the report of the working group (also known as the Jaggenson report), in which the narrow definition of foreign exchange market intervention is: "any foreign exchange transaction conducted by the monetary authorities in the foreign exchange market to influence the exchange rate of the country's currency", which can be carried out by using foreign exchange reserves, transferring between central banks or official lending. In fact, to truly understand the essence and effect of the central bank's intervention in the foreign exchange market, we must also realize the influence of this intervention on the national money supply and policy. Therefore, the means by which the central bank intervenes in the foreign exchange market can be divided into the intervention without changing the existing monetary policy (stehlized intervention, also known as "sterilisation intervention") and the intervention without changing the existing monetary policy (also known as "non-sterilised intervention"). The so-called intervention without changing the policy means that the central bank thinks that the large fluctuation or deviation from the long-term equilibrium of foreign exchange prices is a short-term phenomenon and hopes to change the existing foreign exchange prices without changing the existing money supply. In other words, it is generally believed that the change of interest rate is the key to the change of exchange rate, and the central bank tries to stabilize the exchange rate of the country's currency without changing the domestic interest rate. The central bank can take two-pronged intervention measures:
When the central bank buys or sells foreign exchange in the foreign exchange market, it also sells or buys bonds in the domestic bond market, so that the exchange rate changes while the interest rate remains unchanged. For example, in the foreign exchange market, the exchange rate of the US dollar against the Japanese yen has fallen sharply, and the Bank of Japan hopes to adopt a policy of supporting the US dollar. It can buy dollars and invest them in yen in the foreign exchange market. As a result of buying a lot of dollars and selling yen, the dollar becomes its reserve currency. The increase of yen flow in the market makes Japan's money supply rise, while interest rates show a downward trend. In order to offset the impact of foreign exchange transactions on domestic interest rates, the Bank of Japan can sell bonds in the domestic bond market, which will reduce the circulation of yen in the market and offset the downward trend of interest rates. It should be pointed out that the worse the mutual substitution between domestic bonds and international bonds, the more effective the intervention of the central bank will be without changing the policy, otherwise it will be ineffective. In the foreign exchange market, the central bank influences the exchange rate changes by inquiring about the exchange rate changes and issuing statements, so as to achieve the effect of intervention, which is called the "signal effect" of foreign exchange market intervention. In doing so, the central bank hopes that the foreign exchange market can get a signal that the central bank's monetary policy will change, or the expected exchange rate will change, and so on. Generally speaking, the foreign exchange market always reacts after receiving these signals for the first time. But if the central bank often intervenes in the market with "signal effect", and these signals are not all straight, then it will have the effect of "wolf coming" in the market. Intervention in the foreign exchange market is actually a change in the central bank's monetary policy, which means that the central bank buys and sells foreign exchange in the foreign exchange market with reference, and at the same time allows the domestic money supply and interest rates to change in a direction conducive to achieving the intervention goal. For example, if the mark continues to depreciate in the foreign exchange market, the Bundesbank can throw foreign exchange in the market to buy the mark to support the exchange rate of the mark. With the decrease in the circulation of marks, the German money supply decreases, and interest rates are on the rise. People are willing to keep more marks in the foreign exchange market, so that the exchange rate of marks will rise. Generally speaking, this kind of intervention is very effective, at the cost that the established domestic monetary policy will be affected, and the central bank is willing to take action when it sees that its currency exchange rate deviates from the equilibrium price for a long time. Whether the central bank's intervention is effective is not judged by the number and quantity of money used by the central bank. At least two conclusions can be drawn from the history of central bank intervention in foreign exchange. First, if the abnormal fluctuations in the foreign exchange market are caused by factors such as poor information efficiency, unexpected events and artificial speculation, and the distortions in the foreign exchange market caused by these factors are often short-term, then the intervention of the central bank will be very effective, or the direct intervention of the central bank may at least end this short-term distortion ahead of schedule.
Second, if the long-term level of a country's currency exchange rate is determined by the country's macroeconomic level, interest rate and government monetary policy, then the intervention of the central bank is ineffective in the long run. The reason why the central bank insists on intervention may be to achieve the following two purposes: first, the intervention of the central bank can alleviate the decline or rise of the country's currency in the foreign exchange market, thus avoiding the excessive impact of the violent fluctuations in the foreign exchange market on domestic macroeconomic development. Secondly, the intervention of the central bank often has obvious effects in the short term. The reason is that the foreign exchange market needs some time to digest this sudden government intervention. This gives the central bank some time to reconsider its monetary policy or foreign exchange policy and make appropriate adjustments.
The fundamental problem reflected by the central bank's direct intervention in the foreign exchange market is that under the conditions of market economy and floating exchange rate system, the foreign exchange rate should be decided by the market itself. If we believe that the relationship between supply and demand in the market will automatically adjust the long-term exchange rate of foreign exchange, the direct intervention of the central bank will only have a short-term effect at best, or alleviate the sharp rise or fall, but it will be futile in the long run. To really control the foreign exchange rate, the central bank has to implement a fixed exchange rate system. Whether the fixed exchange rate system is feasible in the current world economic situation is another issue in economic research. But for investors in the foreign exchange market, it is of great significance to understand the reasons, methods, effects and laws of the central bank's intervention in the foreign exchange market for improving investment efficiency.