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Exchange rate volatility and optimal central bank intervention


  • Tseng, Hui-Kuan

    () (The University of North Carolina at Charlotte, Department of Economics)


This research re-examines the desirability of central bank interventions in foreign exchange to reduce spot exchange rate volatility. A small open-economy macroeconomic model is developed to incorporate both macroeconomic fundamentals and micro-structural features of foreign exchange markets. The research derives the optimal central bank intervention based on the fundamental exchange rate, the target exchange rate and the last-period exchange rate. Numerical simulations suggest that central bank interventions tend to dampen spot exchange rate volatility, regardless of the source of disturbances. However, in most cases, central bank interventions only have rather modest effects. Further, the desirability of central bank intervention is generally insensitive to the degrees of price flexibility, capital mobility, speculation, and central bank’s commitment to its target exchange rate.

Suggested Citation

  • Tseng, Hui-Kuan, 2008. "Exchange rate volatility and optimal central bank intervention," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 61(4), pages 729-754.
  • Handle: RePEc:ris:ecoint:0021

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    More about this item


    Macro Fundamentals; Central Bank Intervention; Speculation; Exchange Rate Volatility;

    JEL classification:

    • 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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation


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