Friction model and foreign exchange market intervention
The friction model is consistent with the hypothesis that a central bank intervenes in a foreign exchange market only if the necessity grows beyond certain thresholds. For this feature, the model is adopted in some recent studies as an attractive central bank reaction function. However, with official data on Federal Reserve and Bundesbank intervention, this paper shows that the friction model's advantage relative to a linear model may be negligible in terms of RMSE and MAE of in-sample fitting and out-of-sample forecasts. The implication is that intervention decisions are at the monetary authorities' discretion rather than dictated by a rule.
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- Almekinders, G.J. & Eijffinger, S.C.W., 1996.
"A friction model of daily Bundesbank and Federal Reserve intervention,"
Other publications TiSEM
9ca974cc-1549-4752-8dbe-0, Tilburg University, School of Economics and Management.
- Almekinders, Geert J. & Eijffinger, Sylvester C. W., 1996. "A friction model of daily Bundesbank and Federal Reserve intervention," Journal of Banking & Finance, Elsevier, vol. 20(8), pages 1365-1380, September.
- Baillie, Richard T. & Osterberg, William P., 1997. "Why do central banks intervene?," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 909-919, December.
- Christopher J. Neely, 2000.
"The practice of central bank intervention: looking under the hood,"
2000-028, Federal Reserve Bank of St. Louis.
- Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-10.
- Frenkel, Michael & Pierdzioch, Christian & Stadtmann, Georg, 2005. "Japanese and U.S. interventions in the yen/U.S. dollar market: estimating the monetary authorities' reaction functions," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(4-5), pages 680-698, September.
- Baillie, Richard T. & Osterberg, William P., 2000. "Deviations from daily uncovered interest rate parity and the role of intervention," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 363-379, December.
- Owen F. Humpage, 1996.
"U.S. intervention: assessing the probability of success,"
9608, Federal Reserve Bank of Cleveland.
- Humpage, Owen F, 1999. "U.S. Intervention: Assessing the Probability of Success," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 731-47, November.
- Christopher J. Neely, 2002.
"The temporal pattern of trading rule returns and central bank intervention: intervention does not generate technical trading rule profits,"
2000-018, Federal Reserve Bank of St. Louis.
- Neely, Christopher J., 2002. "The temporal pattern of trading rule returns and exchange rate intervention: intervention does not generate technical trading profits," Journal of International Economics, Elsevier, vol. 58(1), pages 211-232, October.
- Kim, Suk-Joong & Sheen, Jeffrey, 2002. "The determinants of foreign exchange intervention by central banks: evidence from Australia," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 619-649, October.
- Christopher J. Neely, 2006. "Identifying the effects of U.S. intervention on the levels of exchange rates," Working Papers 2005-031, Federal Reserve Bank of St. Louis.
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