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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

    ()
    (CREA, University of Luxembourg)

Abstract

In this paper, we analyze the e¤ectiveness of the direct central bank interventions using a new effectiveness criterion. To this aim, we investigate the e¤ects 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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Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 08-15.

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Date of creation: 2008
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Handle: RePEc:luc:wpaper:08-15

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Citations

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Cited by:
  1. Ariane Szafarz, 2012. "Financial crises in efficient markets: How fundamentalists fuel volatility," ULB Institutional Repository, ULB -- Universite Libre de Bruxelles 2013/149191, ULB -- Universite Libre de Bruxelles.
  2. 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.
  3. 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.
  4. 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.
  5. Daniela Federici & Giancarlo Gandolfo, 2011. "The Euro/Dollar Exchange Rate: Chaotic or Non-Chaotic?," CESifo Working Paper Series 3420, CESifo Group Munich.
  6. Christian D. Dick & Lukas Menkhoff, 2013. "Exchange Rate Expectations of Chartists and Fundamentalists," CESifo Working Paper Series 4181, CESifo Group Munich.
  7. 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.
  8. 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 hal-00547722, HAL.
  9. Lee, Hsiu-Yun, 2011. "Nonlinear exchange rate dynamics under stochastic official intervention," Economic Modelling, Elsevier, Elsevier, vol. 28(4), pages 1510-1518, July.
  10. Albert Wang, F., 2010. "Informed arbitrage with speculative noise trading," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(2), pages 304-313, February.
  11. 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.
  12. 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.

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