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Intervention in the Foreign Exchange Market in a Model with Noise Traders

  • Paul De Grauwe

    (University of Leuven)

  • Marianna Grimaldi

    (University of Leuven)

In this paper we analyze the effectiveness of sterilized interventions in the foreign exchange market. We use a model in which chartists and fundamentalists interact. This model produces speculative noise which leads to systematic deviations of the exchange rate from its fundamentals. In such an environment, interventions can be effective in reducing the noise. It does this by reducing the profitability of noise trading.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 162003.

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Length: 38 pages
Date of creation: Aug 2003
Date of revision:
Handle: RePEc:hkm:wpaper:162003
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