Secrecy versus Selective Disclosure in Sterilized Foreign Exchange Interventions’. Working Paper

We study sterilized interventions and exchange rate targeting in a market microstructure framework. In a setting where a public disclo-sure of the central bank’s target is not desirable for effective interven-tion, we show that selectively disclosing the target to another informed market participant, such as another central bank or a large currency trader, may result in better targeting relative to a regime of complete secrecy. In particular, if the market’s uncertainty over the bank’s tar-get is sufficiently high and if the central bank is leaning against the wind- attempting to move the exchange rate in the opposite direction of where the fundamental based trade takes it- selective disclosure is the preferred intervention regime