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

Michel Beine; Paul De Grauwe; Marianna Grimaldi

doi:10.1016/j.jbankfin.2008.11.014

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

Michel Beine^*, Paul De Grauwe, Marianna Grimaldi

^*Corresponding author for this work

Department of Economics

Research output: Contribution to journal › Article

16 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 language	English
Pages (from-to)	1187-1195
Number of pages	9
Journal	Journal of Banking and Finance
Volume	33
Issue number	7
DOIs	https://doi.org/10.1016/j.jbankfin.2008.11.014
Publication status	Published - Jul 2009

Keywords

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

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10.1016/j.jbankfin.2008.11.014

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KW - Chartist-fundamentalist regimes

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KW - Signalling channel

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