The Coordination Channel of Foreign Exchange Intervention
Stefan Reitz () and
No 16, Computing in Economics and Finance 2006 from Society for Computational Economics
If strong and persistent misalignments of the exchange rate are caused by non-fundamental influences, such that a return to equilibrium is hampered by a coordination failure among fundamentals-based traders, then central bank intervention may act as a coordinating signal, encouraging stabilizing speculators to re-enter the market at the same time. We develop this idea in the framework of a simple microstructural model of exchange rate movements, which we then estimate using daily data on the dollar-mark exchange rate and on Federal Reserve and Bundesbank intervention operations. The results are supportive of the existence of a coordination channel of intervention effectiveness
Keywords: foreign exchange intervention; market microstructure; nonlinear mean reversion (search for similar items in EconPapers)
JEL-codes: C10 F31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-ifn, nep-mon and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecfa:16
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