The Impact of FX Central Bank Intervention in a Noise Trading Framework

De Grauwe, Paul; Grimaldi, Marianna; Beine, Michel A. R.

The Impact of FX Central Bank Intervention in a Noise Trading Framework

40 Pages Posted: 28 Sep 2005

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

Michel A. R. Beine

University of Luxemburg; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 2005

Abstract

In this paper we investigate the effects of central bank interventions (CBI) in a noise trading model with chartists and fundamentalists. We first estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value. Then, we investigate the role of central bank interventions in explaining the switching properties between the two types of agents. We find evidence that in the medium run, interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate.

JEL Classification: F31, F33

Suggested Citation: Suggested Citation

De Grauwe, Paul and Grimaldi, Marianna and Beine, Michel A. R., The Impact of FX Central Bank Intervention in a Noise Trading Framework (August 2005). CESifo Working Paper Series No. 1520. Available at SSRN: https://ssrn.com/abstract=812304