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The Coordination Channel of Foreign Exchange Intervention

  • Stefan Reitz

    ()

    (Economics Deutsche Bundesbank)

  • M.P Taylor

If strong and persistent misalignments of the exchange rate are caused by non-fundamental influences, such that a return to equilibrium is hampered by a coordination failure among fundamentals-based traders, then central bank intervention may act as a coordinating signal, encouraging stabilizing speculators to re-enter the market at the same time. We develop this idea in the framework of a simple microstructural model of exchange rate movements, which we then estimate using daily data on the dollar-mark exchange rate and on Federal Reserve and Bundesbank intervention operations. The results are supportive of the existence of a coordination channel of intervention effectiveness

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 16.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:16
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