The profitability of central bank foreign exchange market intervention

This paper assesses the profitability of foreign exchange market intervention by the Bank of England for the period 1973-1995. Profitability appears to an objective measure of the success of intervention policy, but we show that the tendency of the central bank to "lean against the wind" in its foreign exchange interventions means that profitability calculations will be heavily biased by the amount of cumulative intervention arbitrarily considered. It follows that profitability calculations will be strongly affected by the start-end dates used for calculation purposes. This cumulative intervention bias undermines the usefulness of using the profitability criterion as the sole measure for evaluating intervention policy. Nonetheless, the large sums of public money that can be staked on foreign exchange market interventions suggests the need for open reporting of the profits/losses involved. (C) 2001 Society for Policy Modeling. Published by Elsevier Science Inc.