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Intervention in the Foreign Exchange Market in a Model with Noise Traders

Paul De Grauwe and Marianna Grimaldi
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Marianna Grimaldi: University of Leuven

No 162003, Working Papers from Hong Kong Institute for Monetary Research

Abstract: In this paper we analyze the effectiveness of sterilized interventions in the foreign exchange market. We use a model in which chartists and fundamentalists interact. This model produces speculative noise which leads to systematic deviations of the exchange rate from its fundamentals. In such an environment, interventions can be effective in reducing the noise. It does this by reducing the profitability of noise trading.

Pages: 38 pages
Date: 2003-08
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