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

  • 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.)

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.

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 91.

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Length: 18
Date of creation: 20 Feb 2007
Date of revision:
Handle: RePEc:rtv:ceisrp:91
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  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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