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How should we think about markets for foreign exchange?

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  • Pippenger, John
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    Abstract

    As support for traditional asset models of the foreign exchange market fades, there is growing interest in more general models that include flows from international trade and international investment. One advantage of flow models is that they fit naturally into the recent literature on microstructure, particularly the work on order flow. My objective here is to use intervention data to help discriminate between traditional asset models of the foreign exchange market and more general flow models. The evidence supports a flow approach.

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    Bibliographic Info

    Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt3w40w1b5.

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    Date of creation: 07 Nov 2007
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    Handle: RePEc:cdl:ucsbec:qt3w40w1b5

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    Keywords: exchange rates; foreign exchange markets; intervention;

    References

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    1. Rasmus Fatum & Michael Hutchison, 2003. "Effectiveness of Official Daily Foreign Exchange Market Intervention Operations in Japan," NBER Working Papers 9648, National Bureau of Economic Research, Inc.
    2. Kathryn M. E. Dominguez, 2003. "When Do Central Bank Interventions Influence Intra-Daily and Longer-Term Exchange Rate Movements?," Working Papers, Research Seminar in International Economics, University of Michigan 506, Research Seminar in International Economics, University of Michigan.
    3. Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue May, pages 1-10.
    4. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
    5. Rasmus Fatum & Michael M. Hutchison, 2003. "Is sterilised foreign exchange intervention effective after all? an event study approach," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(487), pages 390-411, 04.
    6. Kearns, Jonathan & Rigobon, Roberto, 2005. "Identifying the efficacy of central bank interventions: evidence from Australia and Japan," Journal of International Economics, Elsevier, Elsevier, vol. 66(1), pages 31-48, May.
    7. Payne, Richard & Vitale, Paolo, 2001. "A Transaction Level Study of the Effects of Central Bank Intervention of Exchange Rates," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3085, C.E.P.R. Discussion Papers.
    8. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 39(3), pages 839-868, September.
    9. Baillie, Richard T. & Osterberg, William P., 1997. "Why do central banks intervene?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 16(6), pages 909-919, December.
    10. Gartner, Manfred, 1987. "Intervention Policy under Floating Exchange Rates: An Analysis of the Swiss Case," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 54(216), pages 439-53, November.
    11. Pippenger, John, 2003. "Modeling foreign exchange intervention: stock versus stock adjustment," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 13(2), pages 137-156, April.
    12. Martin D. D. Evans & Richard K. Lyons, 2006. "Understanding order flow," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 11(1), pages 3-23.
    13. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    14. Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Nov, pages 685-718.
    15. Galati, Gabriele & Melick, William & Micu, Marian, 2005. "Foreign exchange market intervention and expectations: The yen/dollar exchange rate," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(6), pages 982-1011, October.
    16. Carol L. Osler, 2006. "Macro lessons from microstructure," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 11(1), pages 55-80.
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