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The Coordination Channel of Foreign Exchange Intervention

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  • Stefan Reitz

    ()
    (Economics Deutsche Bundesbank)

  • M.P Taylor

Abstract

If strong and persistent misalignments of the exchange rate are caused by non-fundamental influences, such that a return to equilibrium is hampered by a coordination failure among fundamentals-based traders, then central bank intervention may act as a coordinating signal, encouraging stabilizing speculators to re-enter the market at the same time. We develop this idea in the framework of a simple microstructural model of exchange rate movements, which we then estimate using daily data on the dollar-mark exchange rate and on Federal Reserve and Bundesbank intervention operations. The results are supportive of the existence of a coordination channel of intervention effectiveness

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 16.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:16

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Keywords: foreign exchange intervention; market microstructure; nonlinear mean reversion;

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Cited by:
  1. Reitz, Stefan & Slopek, Ulf Dieter, 2008. "Nonlinear oil price dynamics: a tale of heterogeneous speculators?," Discussion Paper Series 1: Economic Studies 2008,10, Deutsche Bundesbank, Research Centre.
  2. Kentaro Iwatsubo & Satoshi Kawanishi, 2011. "The Information Improving Channel of Exchange Rate Intervention: How Do Official Announcements Work?," Discussion Papers 1116, Graduate School of Economics, Kobe University.
  3. Hsu-Ling Chang & Chi-Wei Su, 2010. "The Lending-Deposit Rate Relationship in Eastern European Countries: Evidence from the Rank Test for Non-linear Cointegration," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(6), pages 534-544, December.
  4. Schnatz, Bernd, 2006. "Is reversion to PPP in euro exchange rates non-linear?," Working Paper Series 0682, European Central Bank.
  5. Lothian, James R. & Taylor, Mark P., 2006. "Real Exchange Rates Over the Past Two Centuries : How Important is the Harrod-Balassa-Samuelson Effect?," The Warwick Economics Research Paper Series (TWERPS) 768, University of Warwick, Department of Economics.
  6. Yushi Yoshida & Jan C. Rülke, 2009. "On-Going versus Completed Interventions and Yen/Dollar Expectations - Evidence from Disaggregated Survey Data," Discussion Papers 35, Kyushu Sangyo University, Faculty of Economics, revised Dec 2009.

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