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Spillover Dynamics of Central Bank Interventions

  • Frank H. Westerhoff
  • Cristian Wieland

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. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2004.

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Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 5 (2004)
Issue (Month): 4 (November)
Pages: 435-450

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Handle: RePEc:bla:germec:v:5:y:2004:i:4:p:435-450
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