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Official Foreign Exchange Intervention As A Coordinating Signal In The Dollar-Yen Market

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Mark P. Taylor

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Abstract

I examine the effectiveness of exchange rate intervention within the context of a Markov-switching model for the real dollar-yen exchange rate over the period April 1991-December 2003. The probability of switching between stable and unstable regimes depends nonlinearly upon the amount of intervention, the degree of misalignment and the duration of the regime. I find that intervention increases the probability of stability when the rate is misaligned, and that its influence grows with the degree of misalignment. However, intervention within a small neighbourhood of equilibrium will result in a greater probability of instability. Copyright 2005 Blackwell Publishing Ltd

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Article provided by Blackwell Publishing in its journal Pacific Economic Review.

Volume (Year): 10 (2005)
Issue (Month): 1 (02)
Pages: 73-82
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Handle: RePEc:bla:pacecr:v:10:y:2005:i:1:p:73-82

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  1. Stefan Reitz & M.P Taylor, 2006. "The Coordination Channel of Foreign Exchange Intervention," Computing in Economics and Finance 2006 16, Society for Computational Economics. [Downloadable!]
  2. Reitz, Stefan & Taylor, Mark P., 2006. "The coordination channel of foreign exchange intervention: a nonlinear microstructural analysis," Discussion Paper Series 1: Economic Studies 2006,08, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  3. Carlo Altavilla, 2006. "The (Un-) Stable Relationship between The Exchange rate and its Fundamentals," Discussion Papers 6_2006, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy. [Downloadable!]
    Other versions:
  4. Christopher J. Neely, 2007. "Central bank authorities’ beliefs about foreign exchange intervention," Working Papers 2006-045, Federal Reserve Bank of St. Louis. [Downloadable!]
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  5. Kathryn M.E. Dominguez & Freyan Panthaki, 2007. "The Influence of Actual and Unrequited Interventions," NBER Working Papers 12953, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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