5. Correcting misalignments: While erroneously, central banks may wish to step into the foreign exchange market if they see that the current exchange rate appears to be either overvalued or undervalued. The divergence between short-term FX rates and macroeconomic fundamentals creates a role for sterilised intervention, which influences the exchange rate mainly through its impact on market expectations, inflation expectations, and risk premium. In particular, we think interventions can be used to limit undesired FX rate movements resulting from temporary shocks, which do not affect fundamental macroeconomic conditions. Transmission channels Central bank intervention in FX markets may influence exchange rates, and the economy, via different channels. This was widely discussed by Sarno and Taylor (2001), Adler and Tovar (2011), and Canales-Kriljenko et al (2003). They have identified three main channels: Portfolio-balance channel: In economies with relatively closed financial markets, the replacement between domestic and foreign assets is low. If the ary policy influences the supply and/or demand of financial assets through its own trading activities, this might result in other market participants rebalancing their financial asset portfolios. This channel may be operative for some emerging market economies, especially if the size of foreign exchange interventions is relatively large (eg. Argentina BCRA). Signalling channel: This channel works through expectations about future central bank policy. This tends to have more impact whereby the ary authority is credible and has a history of transparency. However, evidence against the importance of this channel includes the fact that most interventions are not publicly revealed and central banks act as if they assume that unnoticeable intervention in FX markets will maximize the market impact (eg. public banks in Argentina). Empirical studies generally put into question this assumption. Adler and Tovar (2011) found that th