Intervention in the Foreign Exchange Market in a Model with Noise Traders

HKIMR Working Paper No. 16/2003

38 Pages Posted: 24 Aug 2007

See all articles by Paul De Grauwe

Paul De Grauwe

London School of Economics & Political Science (LSE); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for Economic Policy Research (CEPR)

Marianna Grimaldi

Monetary Policy Division Sveriges Riksbank

Date Written: August 2003

Abstract

In this paper we analyze the effectiveness of sterilized interventions in the foreign exchange market. We use a model in which chartists and fundamentalists interact. This model produces speculative noise which leads to systematic deviations of the exchange rate from its fundamentals. In such an environment, interventions can be effective in reducing the noise. It does this by reducing the profitability of noise trading.

Suggested Citation

De Grauwe, Paul and Grimaldi, Marianna, Intervention in the Foreign Exchange Market in a Model with Noise Traders (August 2003). HKIMR Working Paper No. 16/2003. Available at SSRN: https://ssrn.com/abstract=1009142 or http://dx.doi.org/10.2139/ssrn.1009142

Paul De Grauwe (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Marianna Grimaldi

Monetary Policy Division Sveriges Riksbank ( email )

S-103 37 Stockholm
Sweden

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