Sterilized Foreign Exchange Market Interventions in a Chartist-Fundamentalist Exchange Rate Model

Wuerzburg Economic Working Paper No. 50

31 Pages Posted: 19 Mar 2004

See all articles by Robert Schmidt

Robert Schmidt

University of Würzburg - Institute of Economics and Social Sciences

Timo Wollmershaeuser

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

Multiple version iconThere are 2 versions of this paper

Date Written: March 2004

Abstract

Sterilized foreign exchange market interventions are commonly dismissed by economists as an ineffective policy instrument. Nevertheless many central banks operating under independently floating exchange rates regimes are often engaged in sales and purchases of foreign exchange in order to manipulate the current value of their currencies. In this paper we argue that the skepticism of many economists can be ascribed to their orientation on fundamental-based, efficient-market exchange rate models. Given their weak empirical support, however, it is unreasonable to evaluate the effectiveness of sterilized foreign exchange interventions against the background of this class of models. Therefore, the purpose of this paper is to investigate the effectiveness of sterilized foreign exchange market interventions on the basis of a more suitable model. Using a chartist-fundamentalist model we show that central banks can influence exchange rates by using sterilized interventions. In particular, turning points occur earlier and exchange rate misalignments are substantially reduced.

Keywords: Foreign exchange, central bank intervention, heterogeneous expectation

JEL Classification: D84, E58, F31

Suggested Citation

Schmidt, Robert and Wollmershaeuser, Timo, Sterilized Foreign Exchange Market Interventions in a Chartist-Fundamentalist Exchange Rate Model (March 2004). Wuerzburg Economic Working Paper No. 50, Available at SSRN: https://ssrn.com/abstract=518065 or http://dx.doi.org/10.2139/ssrn.518065

Robert Schmidt

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany
+49 931 312 948 (Phone)
+49 931 312 775 (Fax)

Timo Wollmershaeuser (Contact Author)

Ifo Institute for Economic Research ( email )

Poschingerstrasse 5
Munich, 81879
Germany
+49 89 9224 1406 (Phone)
+49 89 9224 1462 (Fax)

HOME PAGE: http://www.ifo.de/link/wollmershaeuser_t.htm

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
179
Abstract Views
1,380
rank
236,351
PlumX Metrics