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    Why should intervening in foreign exchange be the responsibility of the Central Bank alone?

    Fatih Özatay, PhD26 September 2010 - Okunma Sayısı: 874


    I have postponed and avoided writing about this issue for long. But since I have been talking about exchange rate issue and as the issue was featured on the morning news of business TV channels, it is the right time to talk about it. It is about the intervention in the foreign exchange market in Japan. You can find a number of featured stories on the Internet on this intervention as well as the earlier ones. I will quote from a banks news report dated September 15:
    "Japanese Ministry of Finance have intervened in the FX market for the first time in six years. Minister of Finance Noda confirmed the intervention and stated that they have also communicated with authorities overseas... It is declared that the Minister of Finance has sold one trillion yens... Shirakawa, President of Bank of Japan, stated that he hopes the intervention will bring stability to the FX market."

    And the following quotation is from the website of Banco de México (Foreign exchange market/ Banco de Mexico's Foreign Exchange Market operations/Mechanisms):
    "On February 22, 2010, the Foreign Exchange Commission, composed of officials from the Ministry of Finance and Banco de México, and which is responsible for Mexico's foreign exchange policy, issued a press release announcing the re-introduction of put options auction that enable buyers to sell dollars to Banco de México."

    I can provide other country examples with a short search online; but this would be enough. I believe what I try to say is quite obvious: It is not the necessarily the responsibility of central banks alone to decide whether an intervention in the foreign exchange market will be made, the approximate amount to question to the intervention or whether daily FX purchase/sale will be made, the method of this purchase/sale operation and the amount subject to the purchase/sale.

    If people in Turkey are highly complainant about the current exchange rate and if some of the complaints are voiced personally by ministers, here is the alternative, then:  Form a commission composed for instance of the Ministry of Finance and/or Undersecretariat of Foreign Trade and/or State Ministry for Foreign Trade and/or the Central Bank after establishing the legal structure. Of course the commission would have a 'cool' name. This commission could decide all FX interventions either as a surprise, or through announced tenders. And the necessary transaction could be carried out by the Central Bank. Could this work? Yes, it could.
    Then, why did I postpone and avoid writing about this option?

    Such a radical change seems too risky to me. If this alternative is pursued, a system which is functional despite all criticisms would be replaced with another system the functionality of which is uncertain. Of course the new system can be well-devised after examining country examples and learning which path proves a failure, etc.

    However I believe that such an attempt might stir up the hornet's nest for no reason.


    This commentary was published in Radikal daily on 26.09.2010