Monitoring Bands and Monitoring Rules: how currency intervention can change market composition
Luisa Corrado (),
Marcus Miller () and
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Lei Zhang: Department of Economics, University of Warwick.
Authors registered in the RePEc Author Service: Lei Zhang () and
Lei Zhang ()
CEIS Research Paper from Tor Vergata University, CEIS
In this paper we show how trading rules can generate excess volatility in the exchange rate through repeated entry and exit of currency "bears" and "bulls". This is something of a caricature: but it allows us to show that official action can have self-ful.lling e¤ects as market composition shifts in ways that support official stabilization. Intervention if and when the rate moves outside what Williamson has labelled "monitoring bands" can reduce market volatility as the effect of the policy is to select endogenously traders from the market whose expectations match official intervention.
Keywords: Monitoring Rules; Monitoring Band; Bear and Bull Traders; Excess Volatility; Central Bank Volatility (search for similar items in EconPapers)
JEL-codes: D52 F31 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mon
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