Target Zone Interventions and Coordination of Expectations

Stefan Reitz and Frank Westerhoff

No 11, Computing in Economics and Finance 2004 from Society for Computational Economics

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

Keywords: technical and fundamental analysis; heterogeneous agents; central bank intervention; target zone (search for similar items in EconPapers)
JEL-codes: D84 E58 F31 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-cba and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Target Zone Interventions and Coordination of Expectations (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf4:11

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