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The impact of FX Central Bank Intervention in a Noise Trading Framework

  • Michel Beine
  • Paul De Grauwe
  • Marianna Grimaldi

    ()

    (CREA, University of Luxembourg)

In this paper, we analyze the e¤ectiveness of the direct central bank interventions using a new effectiveness criterion. To this aim, we investigate the e¤ects 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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Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 08-15.

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Date of creation: 2008
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Handle: RePEc:luc:wpaper:08-15
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