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Monitoring Bands and Monitoring Rules: how currency intervention can change market composition

Author

Listed:
  • Luisa Corrado

    (Faculty of Economics, University of Cambridge and University of Rome, Tor Vergata.)

  • Marcus Miller

    (Department of Economics, University of Warwick and CEPR)

  • Lei Zhang

    (Department of Economics, University of Warwick.)

Abstract

In this paper we show how trading rules can generate excess volatility in the exchange rate through repeated entry and exit of currency "bears" and "bulls". This is something of a caricature: but it allows us to show that official action can have self-ful.lling e¤ects as market composition shifts in ways that support official stabilization. Intervention if and when the rate moves outside what Williamson has labelled "monitoring bands" can reduce market volatility as the effect of the policy is to select endogenously traders from the market whose expectations match official intervention.

Suggested Citation

  • Luisa Corrado & Marcus Miller & Lei Zhang, 2007. "Monitoring Bands and Monitoring Rules: how currency intervention can change market composition," CEIS Research Paper 91, Tor Vergata University, CEIS.
  • Handle: RePEc:rtv:ceisrp:91
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    File URL: ftp://www.ceistorvergata.it/repec/rpaper/No-91.pdf
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    References listed on IDEAS

    as
    1. Williamson, John, 1998. "Crawling Bands or Monitoring Bands: How to Manage Exchange Rates in a World of Capital Mobility," International Finance, Wiley Blackwell, vol. 1(1), pages 59-79, October.
    2. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
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    Cited by:

    1. Christian Bauer & Paul De Grauwe & Stefan Reitz, 2007. "Exchange Rates Dynamics in a Target Zone – A Heterogeneous Expectations Approach," CESifo Working Paper Series 2080, CESifo Group Munich.
    2. Bauer, Christian & De Grauwe, Paul & Reitz, Stefan, 2009. "Exchange rate dynamics in a target zone--A heterogeneous expectations approach," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 329-344, February.

    More about this item

    Keywords

    Monitoring Rules; Monitoring Band; Bear and Bull Traders; Excess Volatility; Central Bank Volatility;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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