Occasional Interventions to Target Rates with a Foreign Exchange Application

46 Pages Posted: 18 Apr 2011

See all articles by Karen K. Lewis

Karen K. Lewis

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

Date Written: July 1990

Abstract

This paper develops a framework for analyzing the effects upon rates when occasional central bank interventions try to keep rates near target levels. Interestingly, the threat of capital gains or losses induced by this stochastic intervention policy helps contain rates within implicit boundaries around the target level. More importantly, this intervention policy concentrates observations of the exchange rate around the target level and away from the implicit bands. In Monte Carlo simulations, sufficiently tight distributions for intervention around the target level imply that the bands are never reached in practice. As an application, the model is empirically evaluated using exchange rate and intervention observations following the 1987 Louvre accord. In these estimates, the probability of intervention never exceeds more than about .5 while the range of observed exchange rates remain far away from the implicit bands where the probability of intervention is one.

Suggested Citation

Lewis, Karen Kay, Occasional Interventions to Target Rates with a Foreign Exchange Application (July 1990). NBER Working Paper No. w3398, Available at SSRN: https://ssrn.com/abstract=1811476

Karen Kay Lewis (Contact Author)

University of Pennsylvania - Finance Department ( email )

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National Bureau of Economic Research (NBER)

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