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Sustainable Intervention Policies and Exchange Rate Dynamics

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  • Bertola, Giuseppe
  • Caballero, Ricardo

Abstract

Recently developed models of exchange rate dynamics emphasize the expectational effects of infrequent intervention. This paper proposes a stylized probabilistic framework in which such effects can be studied along with realistic concerns about the sustainability of the intervention policy. In this framework, the level of reserves determines the extent to which non-linear intervention affects the level of exchange rates and their sensitivity to movements in fundamentals. We show that all such effects are absent when the possible reserve levels are weighted by their long-run probabilities.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 504.

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Date of creation: Jan 1991
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Handle: RePEc:cpr:ceprdp:504

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Related research

Keywords: Exchange Rates; Reserves; Sustainability of Intervention; Target Zones;

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Cited by:
  1. Wilfling, Bernd & Trede, Mark, 2004. "Estimating Exchange Rate Dynamics with Diffusion Processes : An Application to Greek EMU Data," HWWA Discussion Papers 267, Hamburg Institute of International Economics (HWWA).
  2. Geert Bekaert & Stephen F. Gray, 1999. "Target Zones and Exchange Rates: An Empirical Investigation," NBER Working Papers 5445, National Bureau of Economic Research, Inc.
  3. M. Isabel Campos & Zenón Jiménez-Ridruejo, . "Were the Peseta Exchange Rate Crises Forecastable During Target Zone Period?," Working Papers on International Economics and Finance 00-07, FEDEA.
  4. Campos, M. Isabel & Herrera, Julio & Jimenez-Ridruejo, Zenon, 1999. "Censured Exchange Rates in a Discrete Time Target Zones Model: The Spanish Peseta/Deutsche Mark Case," ERSA conference papers ersa99pa183, European Regional Science Association.
  5. Giancarlo Marini & Giovanni Piersanti, 2012. "Models of Speculative Attacks and Crashes in International Capital Markets," CEIS Research Paper 245, Tor Vergata University, CEIS, revised 24 Jul 2012.
  6. Bertola, Giuseppe & Svensson, Lars E O, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 689-712, July.
  7. Lars E. O. Svensson, 1992. "An Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 119-144, Fall.
  8. Antoine Magnier, 1992. "Théorie des zones cibles et fonctionnement du SME," Économie et Prévision, Programme National Persée, vol. 104(3), pages 87-113.
  9. M. Isabel Campos & Zenon Jimenez-Ridruejo, 2003. "Were the peseta exchange rate crises forecastable during target zone period?," Applied Economics, Taylor & Francis Journals, vol. 35(9), pages 1087-1099.
  10. José Antonio Licandro, 1993. "Análisis de la Zona Objetivo para el Tipo de Cambio en Chile," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 30(90), pages 179-198.

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