Target Zone Interventions and Coordination of Expectations

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Target Zone Interventions and Coordination of Expectations

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Stefan Reitz
Frank Westerhoff

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Abstract

Foreign exchange markets regularly display severe bubbles. This paper explores whether or not so-called target zone interventions are an effective tool for central banks to stabilize the exchange rate. We define such intervention operations as buying/selling an undervalued/overvalued currency when the distance between the exchange rate and its fundamental value exceeds a critical threshold value. On the basis of a non-linear empirical exchange rate model with chartists and fundamentalists, we find that target zone interventions not only have the power to reduce misalignments but also earn profits

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 11.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:11

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Find related papers by JEL classification:
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F31 - International Economics - - International Finance - - - Foreign Exchange

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-08-16 (All new papers)
NEP-CBA-2004-08-16 (Central Banking)
NEP-IFN-2004-08-16 (International Finance)

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Other versions:
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Other versions:
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