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The impact of FX central bank intervention in a noise trading framework

  • Beine, Michel
  • Grauwe, Paul De
  • Grimaldi, Marianna

In this paper, we analyse the effectiveness of the direct central bank interventions using a new effectiveness criterion. To this aim, we investigate the effects of central bank interventions (CBI) in a noise trading model with chartists and fundamentalists. We first estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value. Then, we investigate the role of central bank interventions for explaining the switching properties between the two types of agents. We find evidence that in the medium run, interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 7 (July)
Pages: 1187-1195

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Handle: RePEc:eee:jbfina:v:33:y:2009:i:7:p:1187-1195
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Paul Grauwe & Hans Dewachter, 1993. "A chaotic model of the exchange rate: The role of fundamentalists and chartists," Open Economies Review, Springer, vol. 4(4), pages 351-379, December.
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  13. BEINE, Michel & LAURENT, Sébastien & LECOURT, Christelle, . "Official central bank interventions and exchange rate volatility: Evidence from a regime-switching analysis," CORE Discussion Papers RP 1705, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  18. Jonathan Kearns & Roberto Rigobon, 2003. "Identifying the Efficacy of Central Bank Interventions: Evidence from Australia," RBA Research Discussion Papers rdp2003-04, Reserve Bank of Australia.
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