Monitoring Bands and Monitoring Rules: how currency intervention can change market composition
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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- Williamson, John, 1998.
"Crawling Bands or Monitoring Bands: How to Manage Exchange Rates in a World of Capital Mobility,"
Wiley Blackwell, vol. 1(1), pages 59-79, October.
- John Williamson, 1999. "Crawling Bands or Monitoring Bands: How to Manage Exchange Rates in a World of Capital Mobility," Policy Briefs PB99-03, Peterson Institute for International Economics.
- Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March. Full references (including those not matched with items on IDEAS)