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Occasional Interventions to Target Rates with a Foreign Exchange Application

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  • Karen K. Lewis
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    This paper develops a framework for analyzing the effects upon rates when occasional central bank interventions try to keep rates near target levels. Interestingly, the threat of capital gains or losses induced by this stochastic intervention policy helps contain rates within implicit boundaries around the target level. More importantly, this intervention policy concentrates observations of the exchange rate around the target level and away from the implicit bands. In Monte Carlo simulations, sufficiently tight distributions for intervention around the target level imply that the bands are never reached in practice. As an application, the model is empirically evaluated using exchange rate and intervention observations following the 1987 Louvre accord. In these estimates, the probability of intervention never exceeds more than about .5 while the range of observed exchange rates remain far away from the implicit bands where the probability of intervention is one.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3398.

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    Date of creation: Jul 1990
    Publication status: published as American Economic Review, Volume 85, 1995, "Occasional Interventions to Target Rates, September, pp.691-715.
    Handle: RePEc:nbr:nberwo:3398
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    1. Owen F. Humpage, 1988. "Intervention and the dollar's decline," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-16.
    2. Klein, Michael W., 1992. "Big effects of small interventions: The informational role of intervention in exchange rate policy," European Economic Review, Elsevier, vol. 36(4), pages 915-924, May.
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