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The Impact of FX Central Bank Intervention in a Noise Trading Framework

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  • Michel Beine
  • Paul De Grauwe
  • Marianna Grimaldi

Abstract

In this paper 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 in 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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1520.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1520

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Citations

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Cited by:
  1. Ariane Szafarz, 2010. "Financial Crises in Efficient Markets: How Fundamentalists Fuel Volatility," Working Papers CEB, ULB -- Universite Libre de Bruxelles 10-052, ULB -- Universite Libre de Bruxelles.
  2. Daniela Federici & Giancarlo Gandolfo, 2011. "The Euro/Dollar Exchange Rate: Chaotic or Non-Chaotic?," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c016_035, DEGIT, Dynamics, Economic Growth, and International Trade.
  3. Kocenda, Evzen & Poghosyan, Tigran, 2009. "Macroeconomic sources of foreign exchange risk in new EU members," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(11), pages 2164-2173, November.
  4. 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.
  5. 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.
  6. 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.
  7. Charles, Amélie & Darné, Olivier & Kim, Jae H., 2012. "Exchange-rate return predictability and the adaptive markets hypothesis: Evidence from major foreign exchange rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(6), pages 1607-1626.
  8. 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.
  9. 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.
  10. Lee, Hsiu-Yun, 2011. "Nonlinear exchange rate dynamics under stochastic official intervention," Economic Modelling, Elsevier, Elsevier, vol. 28(4), pages 1510-1518, July.
  11. 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.
  12. Albert Wang, F., 2010. "Informed arbitrage with speculative noise trading," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(2), pages 304-313, February.

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