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Realignment Expectations, Forward Rate Bias, and Sterilized Intervention in an Adjustable Peg Exchange Rate Model with Policy Optimization

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  • Mr. Peter Isard

Abstract

The paper models an adjustable peg exchange rate arrangement as a policy rule with an escape clause under which the timing and magnitudes of realignments are the outcomes of policy optimization decisions. Under the assumptions that market participants are rational, risk averse, and fully informed about the incentives of policymakers, the analysis focuses on the implications for relating realignment expectations to the state variables that enter the policy objective function, for modeling the bias in using forward exchange rates to predict future spot rates, and for characterizing the effectiveness of sterilized intervention.

Suggested Citation

  • Mr. Peter Isard, 1994. "Realignment Expectations, Forward Rate Bias, and Sterilized Intervention in an Adjustable Peg Exchange Rate Model with Policy Optimization," IMF Working Papers 1994/020, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1994/020
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    Keywords

    WP; exchange rate;

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