The Impact of FX Central Bank Intervention in a Noise Trading Framework

Michel Beine, Paul De Grauwe and Marianna Grimaldi

Chapter 6 in Exchange Rates and Global Financial Policies, 2014, pp 189-216 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In this paper, we analyze 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 toward 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 showing that in the medium run, interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate.

Keywords: Exchange Rate; Financial Policies; Turbulence; Exchange Market; Motenary Union; Macroeconomics; Economic Models; Behaviorial Economics; Monetary Integration; Euro; Financial Crisis; European Monetary Policy; Dynamic Stochastic General Equilibriumauthor (search for similar items in EconPapers)
Date: 2014
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Related works:
Journal Article: The impact of FX central bank intervention in a noise trading framework (2009)
Working Paper: The impact of FX Central Bank Intervention in a Noise Trading Framework (2008)
Working Paper: The Impact of FX Central Bank Intervention in a Noise Trading Framework (2005)
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