IDEAS home Printed from https://ideas.repec.org/p/sce/scecf4/11.html
   My bibliography  Save this paper

Target Zone Interventions and Coordination of Expectations

Author

Listed:
  • Stefan Reitz
  • Frank Westerhoff

Abstract

Foreign exchange markets regularly display severe bubbles. This paper explores whether or not so-called target zone interventions are an effective tool for central banks to stabilize the exchange rate. We define such intervention operations as buying/selling an undervalued/overvalued currency when the distance between the exchange rate and its fundamental value exceeds a critical threshold value. On the basis of a non-linear empirical exchange rate model with chartists and fundamentalists, we find that target zone interventions not only have the power to reduce misalignments but also earn profits

Suggested Citation

  • Stefan Reitz & Frank Westerhoff, 2004. "Target Zone Interventions and Coordination of Expectations," Computing in Economics and Finance 2004 11, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:11
    as

    Download full text from publisher

    File URL: http://repec.org/sce2004/up.20522.1075113444.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290 World Scientific Publishing Co. Pte. Ltd..
    2. Day, Richard H. & Huang, Weihong, 1990. "Bulls, bears and market sheep," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 299-329, December.
    3. C. Chiarella & X-Z. He, 2001. "Asset price and wealth dynamics under heterogeneous expectations," Quantitative Finance, Taylor & Francis Journals, vol. 1(5), pages 509-526.
    4. Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-10.
    5. C. H. Hommes, 2001. "Financial markets as nonlinear adaptive evolutionary systems," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 149-167.
    6. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-153, March.
    7. LeBaron, Blake, 1999. "Technical trading rule profitability and foreign exchange intervention," Journal of International Economics, Elsevier, vol. 49(1), pages 125-143, October.
    8. repec:wsi:ijtafx:v:03:y:2000:i:04:n:s0219024900000826 is not listed on IDEAS
    9. Westerhoff Frank H. & Reitz Stefan, 2003. "Nonlinearities and Cyclical Behavior: The Role of Chartists and Fundamentalists," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 7(4), pages 1-15, December.
    10. Sarno,Lucio & Taylor,Mark P., 2003. "The Economics of Exchange Rates," Cambridge Books, Cambridge University Press, number 9780521485845, April.
    11. LeBaron, Blake & Arthur, W. Brian & Palmer, Richard, 1999. "Time series properties of an artificial stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1487-1516, September.
    12. Farmer, J. Doyne & Joshi, Shareen, 2002. "The price dynamics of common trading strategies," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 149-171, October.
    13. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
    14. Wieland, Cristian & Westerhoff, Frank H., 2005. "Exchange rate dynamics, central bank interventions and chaos control methods," Journal of Economic Behavior & Organization, Elsevier, vol. 58(1), pages 117-132, September.
    15. Hung, Juann H, 1997. "Intervention strategies and exchange rate volatility: a noise trading perspective," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 779-793, September.
    16. Lux, T. & M. Marchesi, "undated". "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents," Discussion Paper Serie B 437, University of Bonn, Germany, revised Jul 1998.
    17. Saacke, Peter, 2002. "Technical analysis and the effectiveness of central bank intervention," Journal of International Money and Finance, Elsevier, vol. 21(4), pages 459-479, August.
    18. Carl Chiarella & Roberto Dieci & Laura Gardini, 2005. "The Dynamic Interaction of Speculation and Diversification," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(1), pages 17-52.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Westerhoff Frank H., 2008. "The Use of Agent-Based Financial Market Models to Test the Effectiveness of Regulatory Policies," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 228(2-3), pages 195-227, April.
    2. Athanasiou, George & Kotsios, Stelios, 2008. "An algorithmic approach to exchange rate stabilization," Economic Modelling, Elsevier, vol. 25(6), pages 1246-1260, November.

    More about this item

    Keywords

    technical and fundamental analysis; heterogeneous agents; central bank intervention; target zone;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecf4:11. 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: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/sceeeea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.