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The impact of FX central bank intervention in a noise trading framework

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  • Beine, Michel
  • Grauwe, Paul De
  • Grimaldi, Marianna

Abstract

In this paper, we analyse the effectiveness of the direct central bank interventions using a new effectiveness criterion. To this aim, we investigate the effects of central bank interventions (CBI) in a noise trading model with chartists and fundamentalists. We first estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value. Then, we investigate the role of central bank interventions for explaining the switching properties between the two types of agents. We find evidence that in the medium run, interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 7 (July)
Pages: 1187-1195

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Handle: RePEc:eee:jbfina:v:33:y:2009:i:7:p:1187-1195

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Keywords: FX markets Central bank intervention effectiveness Chartist-fundamentalist regimes Signalling channel;

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References

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Citations

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Cited by:
  1. Amélie Charles & Olivier Darné & Jae H. Kim, 2010. "Exchange-Rate Return Predictability and the Adaptive Markets Hypothesis: Evidence from Major Foreign Exchange Rates," Working Papers hal-00547722, HAL.
  2. Rosa, Carlo, 2011. "The high-frequency response of exchange rates to monetary policy actions and statements," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(2), pages 478-489, February.
  3. Szafarz, Ariane, 2012. "Financial crises in efficient markets: How fundamentalists fuel volatility," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(1), pages 105-111.
  4. Tigran Poghosyan & Evzen Kocenda, 2007. "Macroeconomic Sources of Foreign Exchange Risk in New EU Members," William Davidson Institute Working Papers Series wp898, William Davidson Institute at the University of Michigan.
  5. Albert Wang, F., 2010. "Informed arbitrage with speculative noise trading," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(2), pages 304-313, February.
  6. Lee, Hsiu-Yun, 2011. "Nonlinear exchange rate dynamics under stochastic official intervention," Economic Modelling, Elsevier, vol. 28(4), pages 1510-1518, July.
  7. Dick, Christian D. & Menkhoff, Lukas, 2013. "Exchange rate expectations of chartists and fundamentalists," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(7), pages 1362-1383.
  8. Lee, Hsiu-Yun & Lai, Hung-Pin, 2011. "A structural threshold model of the exchange rate under optimal intervention," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(6), pages 931-946, October.
  9. Daniela Federici & Giancarlo Gandolfo, 2011. "The Euro/Dollar Exchange Rate: Chaotic or Non-Chaotic?," CESifo Working Paper Series 3420, CESifo Group Munich.
  10. Chuluun, Tuugi & Eun, Cheol S. & Kiliç, Rehim, 2011. "Investment intensity of currencies and the random walk hypothesis: Cross-currency evidence," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(2), pages 372-387, February.
  11. Beine, Michel & Janssen, Gust & Lecourt, Christelle, 2009. "Should central bankers talk to the foreign exchange markets?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 28(5), pages 776-803, September.
  12. Federici, Daniela & Gandolfo, Giancarlo, 2012. "The Euro/Dollar exchange rate: Chaotic or non-chaotic? A continuous time model with heterogeneous beliefs," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(4), pages 670-681.

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