Central bank coordinated intervention: a microstructure approach

In this article, we develop a theoretical microstructure model of coordinated central bank intervention based on asymmetric information. We also set up a game where central banks will choose whether to intervene unilaterally or in a coordinated manner, and we study the conditions under which they prefer to coordinate. Finally, we study the economic implications of coordination on some measures of market quality and show that the model predicts higher volatility and more significant exchange rate changes when central banks coordinate compared to the case when they intervene unilaterally. These predictions are in line with empirical evidence. Further, the effects of coordinated intervention are, from a social point of view, more desirable than those of unilateral intervention.