The Impact of FX Central Bank Intervention in a Noise Trading Framework
40 Pages Posted: 28 Sep 2005
Date Written: August 2005
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