Target Zone Interventions and Coordination of Expectations

Stefan Reitz, Frank Westerhoff and C. Wieland
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C. Wieland: RAAD Consult

Journal of Optimization Theory and Applications, 2006, vol. 128, issue 2, No 13, 453-467

Abstract: Abstract Foreign exchange markets display regularly severe bubbles. This paper explores whether or not the 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 nonlinear empirical exchange rate model with chartists and fundamentalists, we find that not only target zone interventions have the power to reduce misalignments but also to earn profits.

Keywords: Foreign exchange markets; technical and fundamental analysis; heterogeneous agents; central bank interventions (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1007/s10957-006-9027-6

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