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The impact of FX central bank intervention in a noise trading framework

Beine, Michel and de Grauwe, Paul and Grimaldi, Marianna (2009) The impact of FX central bank intervention in a noise trading framework. Journal of Banking and Finance, 33 (7). pp. 1187-1195. ISSN 0378-4266

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Identification Number: 10.1016/j.jbankfin.2008.11.014

Abstract

In this paper, we analyse the effectiveness of the direct centralbankinterventions using a new effectiveness criterion. To this aim, we investigate the effects of centralbankinterventions (CBI) in anoisetrading model with chartists and fundamentalists. We first estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value. Then, we investigate the role of centralbankinterventions for explaining the switching properties between the two types of agents. We find evidence that in the medium run, interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate.

Item Type: Article
Official URL: http://www.journals.elsevier.com/journal-of-bankin...
Additional Information: © 2009 Elsevier
Subjects: H Social Sciences > HC Economic History and Conditions
J Political Science > JZ International relations
JEL classification: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C10 - General
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Sets: Departments > European Institute
Collections > Economists Online
Date Deposited: 05 Oct 2012 13:19
Last Modified: 05 Oct 2012 13:19
URI: http://eprints.lse.ac.uk/id/eprint/46595

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