The impact of FX central bank intervention in a noise trading framework

Michel Beine*, Paul De Grauwe, Marianna Grimaldi

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

18 Citations (Scopus)

Abstract

In this paper, we analyse the effectiveness of the direct central bank interventions using a new effectiveness criterion. To this aim, we investigate the effects of central bank interventions (CBI) in a noise trading model with chartists and fundamentalists. We first estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value. Then, we investigate the role of central bank interventions for explaining the switching properties between the two types of agents. We find evidence that in the medium run, interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate.

Original languageEnglish
Pages (from-to)1187-1195
Number of pages9
JournalJournal of Banking and Finance
Volume33
Issue number7
DOIs
Publication statusPublished - Jul 2009

Keywords

  • Central bank intervention effectiveness
  • Chartist-fundamentalist regimes
  • FX markets
  • Signalling channel

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