Learning About Intervention Target Zones

35 Pages Posted: 19 Jul 2010

See all articles by Michael W. Klein

Michael W. Klein

Tufts University - The Fletcher School of Law and Diplomacy; National Bureau of Economic Research (NBER)

Karen K. Lewis

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: April 1991

Abstract

This paper provides a framework for evaluating how market participants' beliefs about foreign exchange target zones change as they learn about central bank intervention policy. In order to examine this behavior, we first generalize the standard target zone model to allow for intra-marginal intervention. Intra-marginal intervention implies that the position of market participants' beliefs about the target zone can be determined from their beliefs about the likelihood of intervention. As an application of this model, we estimate a probability of intervention model using daily exchange rates and market observations of central bank interventions following the Louvre Accord. Interestingly, even over this relatively stable Louvre Accord period, we find that the market's views of intervention target zones would have varied quite a bit over time.

Suggested Citation

Klein, Michael W. and Lewis, Karen Kay, Learning About Intervention Target Zones (April 1991). NBER Working Paper No. w3674, Available at SSRN: https://ssrn.com/abstract=1644793

Michael W. Klein (Contact Author)

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Medford, MA 02155
United States
617-627-2718 (Phone)
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National Bureau of Economic Research (NBER)

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Karen Kay Lewis

University of Pennsylvania - Finance Department ( email )

The Wharton School
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Philadelphia, PA 19104
United States
215-898-7637 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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