The Forward Exchange Market, Speculation, and Exchange Market Intervention
This paper develops a stochastic equilibrium model of an open economy incorporating speculation in the forward exchange market. The model is used to examine two issues. The first is the role of speculation in stabilizing the economy against stochastic disturbances. Much risk averse speculation stabilizes domestic income against disturbances in the domestic bond market and forward exchange marketbut exacerbates the effect of foreign disturbances. Speculation may dampen or augment the effect of money market and output supply disturbances depending upon the share of foreign bonds in total wealthand the interest elasticity of bond demand. The second issue that the model addresses is the role of the forward market in stabilization policy. Forward market intervention (or its equivalent in this model,sterilized spot market intervention) does not provide monetary authorities additional leverage in stabilizing income beyond unsterilized spot market intervention. Intervention rules based on reactions to both the forward and the spot exchange rates, however, can outper-form intervention policies responding to the spot rate alone,regardless of the market in which intervention occurs.
|Date of creation:||Jun 1983|
|Publication status:||published as Eaton, Jonathan and Stephen J. Turnovsky. "The Forward Exchange Market, Speculation, and Exchange Market Intervention." Quarterly Journal of Economics , Vol. 99, No. 1, (February 1984), pp. 45-69. John Wilely and Sons.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-1055, December.
- Flood, Robert P, 1979. "Capital Mobility and the Choice of Exchange Rate System," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 405-416, June.
- Don E. Roper & Stephen J. Turnovsky, 1980. "Optimal Exchange Market Intervention in a Simple Stochastic Macro Model," Canadian Journal of Economics, Canadian Economics Association, vol. 13(2), pages 296-309, May.
- Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, vol. 45(6), pages 1377-1385, September.
- Fama, Eugene F & Farber, Andre, 1979.
"Money, Bonds, and Foreign Exchange,"
American Economic Review,
American Economic Association, vol. 69(4), pages 639-649, September.
- Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
- Adler, Michael & Dumas, Bernard, 1977. "The Microeconomics of the Firm in an Open Economy," American Economic Review, American Economic Association, vol. 67(1), pages 180-189, February.
- Willem H. Buiter & Jonathan Eaton, 1980.
"Policy Decentralization and Exchange Rate Management in Interdependent Economies,"
NBER Working Papers
0531, National Bureau of Economic Research, Inc.
- Buiter, Willem H & Eaton, Jonathan, 1980. "Policy Decentralisation and Exchange Rate Management in Interdependent Economies," The Warwick Economics Research Paper Series (TWERPS) 172, University of Warwick, Department of Economics.
- Robert Driskill & Stephen McCafferty, 1980. "Exchange-Rate Variability, Real and Monetary Shocks, and the Degree of Capital Mobility Under Rational Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 95(3), pages 577-586.
- S. C. Tsiang, 1959. "The Theory of Forward Exchange and Effects of Government Intervention on the Forward Exchange Market," IMF Staff Papers, Palgrave Macmillan, vol. 7(1), pages 75-106, April.
- Cox, W. Michael, 1980. "Unanticipated money, output, and prices in the small economy," Journal of Monetary Economics, Elsevier, vol. 6(3), pages 359-384, July.
- Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
- Turnovsky, Stephen J, 1976. "The Relative Stability of Alternative Exchange Rate Systems in the Presence of Random Disturbances," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(1), pages 29-50, February.
- Frankel, Jeffrey A., 1979. "The diversifiability of exchange risk," Journal of International Economics, Elsevier, vol. 9(3), pages 379-393, August.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1138. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.