Intervention in the Foreign Exchange Market in a Model with Noise Traders
HKIMR Working Paper No. 16/2003
38 Pages Posted: 24 Aug 2007
Date Written: August 2003
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.
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