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

Michel Beine, Paul De Grauwe and Marianna Grimaldi

Journal of Banking & Finance, 2009, vol. 33, issue 7, pages 1187-1195

Abstract: In this paper, we analyse the effectiveness of the direct central bank interventions using a new effectiveness criterion. To this aim, we investigate the effects of central bank interventions (CBI) in a noise trading 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 central bank interventions 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.

Keywords: FX; markets; Central; bank; intervention; effectiveness; Chartist-fundamentalist; regimes; Signalling; channel (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:7:p:1187-1195

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