This book covers a specialized subject of international money and finance, which is the official involvement of the central bank in the foreign exchange market. The research refers to a developing world, Lebanon, where, contrary to the case in developed nations, domestic and foreign assets are incomplete substitutes. This helps the central bank to provide another instrument for monetary policy and an extra one. In our study, there are five main chapters. The first is the efficacy of official action without sterilization. The second is about the efficacy of official action that has been sterilized. Sterilized intervention is a free market process that leaves unchanged the monetary base or the money of high power, and the supply of money. The third is about the efficacy of unintended, or secret, official action. The fourth chapter focuses on the monetary authorities’ alternative reaction function, which is more complicated than the one believed earlier. An alternative specification of the role of official interference is given in the last chapter. My plan calls for two inquiries. Since Lebanon follows an adjustable peg with unpublished magnitudes and bands, the black market foreign exchange rates need to be computed. And, due to the absence of direct intervention details, the monthly shift in foreign securities held by the central bank is attributable to intervention. Since the central bank in Lebanon intervenes in the financial market on an almost daily basis, intervention is ongoing, not intermittent, as in other countries. Official intervention is found to be highly successful, whatever its type, and the foreign exchange rate response is consistent with and consistent with the portfolio balance model. A central bank’s acquisition of foreign currency contributes to a weakening of the domestic exchange rate. In addition, a one billion US dollar purchase leads to a weakening of the foreign exchange rate in the range between 0.6% and 2%. For other nations, this effect is comparable to the empirical findings in the literature. There are other inferences obtained. Due to the induced money supply shockwaves that reinforce the impact of unsterilized intervention, unsterilized intervention, whether real or secret, has a higher explanatory power than sterilized intervention. And there is a greater predictive power of secret interference than real intervention. The central bank’s reaction feature to the dollar rate is highly statistically important, and the findings do not differ significantly in the alternative relationship. A leaning-against-the-wind strategy describes the reaction functions.
However, as is already known, fixed and pegged foreign exchange rates, along with the risk of civil strife and dislocation, are vulnerable to a dollar run, a dearth in foreign exchange balances, repeated budget and current account deficits, and a bank crisis. In this situation, the central bank’s foreign reserves would become exhausted within a short period of time. The financial emergency in Lebanon after October 17, 2019, could be due to the threat that, in times of crisis, foreign exchange reserves will not be adequate to back up and defend the domestic currency. Nevertheless, there was usually unforeseen competition for more than one disastrous occurrence, whether economic or social. This does not stop us from researching the time prior to October 2019 that was relatively calm and stable, but odd, reckless and corrupt.
The general conclusion of my investigation is that official interference is highly successful, whatever its definition, and that it has served the country well, mostly during a quiet time in the past.
Samih Antoine Azar
Full Professor of Business Administration & Economics, Faculty of Business Administration & Economics, Haigazian University, Lebanon.
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