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Spill-over dynamics of central bank interventions

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Author Info
Frank Westerhoff () (University of Osnabrueck, Department of Economics)
Cristian Wieland (University of Osnabrueck, Department of Economics)

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Abstract

Central banks frequently intervene in foreign exchange markets to reduce volatility or to correct misalignments. Such operations may be successful if they drive away destabilizing speculators. However, the speculators do not simply vanish but may reappear on other foreign exchange markets. Using a model in which traders are able to switch between foreign exchange markets, we demonstrate that while a central bank indeed has several means at hand to stabilize a specific market, the variability of the other markets depends on how the interventions are implemented.

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Paper provided by Society for Computational Economics in its series Modeling, Computing, and Mastering Complexity 2003 with number 21.

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Handle: RePEc:sce:cplx03:21

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Related research
Keywords: foreign exchange markets; central bank intervention; technical and fundamental analysis;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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  3. Lux, T. & M. Marchesi, . "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents," Discussion Paper Serie B 437, University of Bonn, Germany, revised Jul 1998.
  4. Lux, Thomas & Marchesi, Michele, 2002. "Journal of economic behavior and organization: special issue on heterogeneous interacting agents in financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 143-147, October. [Downloadable!] (restricted)
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  6. Chiarella, Carl & Dieci, Roberto & Gardini, Laura, 2002. "Speculative behaviour and complex asset price dynamics: a global analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 173-197, October. [Downloadable!] (restricted)
  7. LeBaron, Blake, 1999. "Technical trading rule profitability and foreign exchange intervention," Journal of International Economics, Elsevier, vol. 49(1), pages 125-143, October. [Downloadable!] (restricted)
  8. Lucio Sarno & Mark P. Taylor, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September. [Downloadable!] (restricted)
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  9. Dominguez, Kathryn M. E., 2003. "The market microstructure of central bank intervention," Journal of International Economics, Elsevier, vol. 59(1), pages 25-45, January. [Downloadable!] (restricted)
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  10. Blake LeBaron, 1994. "Technical Trading Rule Profitability and Foreign Exchange Intervention," International Finance 9411002, EconWPA. [Downloadable!]
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  11. Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," The Regional Economist, Federal Reserve Bank of St. Louis, issue May, pages 1-10. [Downloadable!]
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  12. repec:rus:hseeco:21608 is not listed on IDEAS
  13. Farmer, J. Doyne & Joshi, Shareen, 2002. "The price dynamics of common trading strategies," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 149-171, October. [Downloadable!] (restricted)
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