But it must be recognised that these interventions are not to manage the level of exchange rate, as the ringgit remains a floating currency. Demand and supply forces must be allowed to determine the level of the exchange rate. But at the same time, we cannot be oblivious to the aberrations in demand and supply, originating from large speculative positions. Large swings in the exchange rate are detrimental to our country. It is highly risky for an open economy like Malaysia that relies on international trade activities and exchange rate as a price mechanism. Through experience and practice, we have generally accepted that in a floating rate regime, the market should be left to its devices in determining exchange rate levels. However, empirical evidence suggests that markets mechanisms often go through bouts of distortion. This is not at all surprising. It is proven time and again. The latest Nobel Prize recipient for economics, Professor Richard Thaler’s work have centred on the essence that economic agents are humans. And humans are irrational. This is the opposite of conventional economics that rely on the central assumption that all economic agents behave rationally. This irrationality is the main catalyst for speculative activities in the FX market. When speculative activities are large, they can swing towards extremes. Under these situations, and from the central bank’s perspective, intervention is then necessary to rebalance the supply and demand forces, and to manage the volatility caused by violent swings in the exchange rate. Intervention in a floating rate regime is not new.
Because this would call for greater variation in employment and growth, an outside observer would, all else equal, infer a lower value for lambda. This is when different views regarding the transmission mechanism of monetary policy become relevant. Those who regard the impact of monetary policy on the economy as relatively rapid may be more inclined to 22  See e.g. Blanchard, O, Cerutti, E and Summers, L (2015), “Inflation and activity – two explorations and their monetary policy implications”, NBER working paper No. 21726. 23 At root this is because, in aggregate, retailers whose costs rise adjust their prices only gradually, perhaps reflecting strategic, competitive concerns, or because many importers, over the short term at least, hedge their foreign exchange exposure. See Box on page 28 of the November 2015 Inflation Report for a review. 12  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches  12  act in response to shocks whose effects are relatively short-lived. All else equal this would tend to produce a shallower observed relationship between inflationary shocks and output gaps – a lower lambda. If, on the other hand, monetary policy is viewed as operating with a substantial lag, it may be that the more enduring influences on inflation are the ones that weigh most heavily in the monetary policy decision. In this case, this would tend to produce a steeper observed relationship between inflationary shocks and output gaps – a higher lambda.