Measuring the Profitability and Effectiveness of Foreign Exchange Market Intervention: Some Canadian Evidence

When the major industrial countries decided to move to a system of managed flexible exchange rates following the collapse of the Bretton Woods system, many observers thought that this would reduce, if not eliminate, the need for official foreign exchange market intervention. During the past fifteen years, however, intervention in most countries, including Canada, has risen steadily in both frequency and intensity.

This paper presents new empirical evidence on the profitability and effectiveness of Canadian intervention from 1975 to 1988. The results suggest that the government's foreign exchange operations have been very profitable and have tended to be stabilizing, in the sense that authorities were typically pushing the exchange rate towards its long-run trend and helping to reduce short-run volatility in the market.