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Occasional Interventions to Target Rates with a Foreign Exchange Application

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  • Karen K. Lewis
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    Abstract

    This paper develops a framework for analyzing the effects upon rates when occasional central bank interventions try to keep rates near target levels. Interestingly, the threat of capital gains or losses induced by this stochastic intervention policy helps contain rates within implicit boundaries around the target level. More importantly, this intervention policy concentrates observations of the exchange rate around the target level and away from the implicit bands. In Monte Carlo simulations, sufficiently tight distributions for intervention around the target level imply that the bands are never reached in practice. As an application, the model is empirically evaluated using exchange rate and intervention observations following the 1987 Louvre accord. In these estimates, the probability of intervention never exceeds more than about .5 while the range of observed exchange rates remain far away from the implicit bands where the probability of intervention is one.

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    File URL: http://www.nber.org/papers/w3398.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3398.

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    Date of creation: Jul 1990
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    Handle: RePEc:nbr:nberwo:3398

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    1. Owen F. Humpage, 1988. "Intervention and the dollar's decline," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-16.
    2. Klein, Michael W., 1992. "Big effects of small interventions: The informational role of intervention in exchange rate policy," European Economic Review, Elsevier, vol. 36(4), pages 915-924, May.
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    Cited by:
    1. António Portugal Duarte & João Sousa Andrade & Adelaide Duarte, 2013. "Exchange Rate Target Zones: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 27(2), pages 247-268, 04.
    2. Esaka, Taro, 2000. "The Louvre Accord and central bank intervention: was there a target zone?," Japan and the World Economy, Elsevier, vol. 12(2), pages 107-126, May.
    3. James M. Boughton & William H. Branson & Alphecca Muttardy, 1989. "Commodity Prices and Inflation: Evidence From Seven Large Industrial Countries," NBER Working Papers 3158, National Bureau of Economic Research, Inc.
    4. Buiter, Willem H & Pesenti, Paolo, 1990. "Rational Speculative Bubbles in an Exchange Rate Target Zone," CEPR Discussion Papers 479, C.E.P.R. Discussion Papers.
    5. Francisco Delgado & Bernard Dumas, 1991. "Target Zones Big and Small," NBER Working Papers 3601, National Bureau of Economic Research, Inc.
    6. Antoine Magnier, 1992. "Théorie des zones cibles et fonctionnement du SME," Économie et Prévision, Programme National Persée, vol. 104(3), pages 87-113.
    7. Richard T. Baillie & Owen F. Humpage, 1992. "Post-Louvre intervention: did target zones stabilize the dollar?," Working Paper 9203, Federal Reserve Bank of Cleveland.
    8. Leachman, Lori L. & Francis, Bill, 1995. "Long-run relations among the G-5 and G-7 equity markets: Evidence on the Plaza and Louvre Accords," Journal of Macroeconomics, Elsevier, vol. 17(4), pages 551-577.

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