Monitoring Bands and Monitoring Rules: How Currency Intervention Can Change Market Composition

18 Pages Posted: 12 Feb 2007

See all articles by Luisa Corrado

Luisa Corrado

University of Rome Tor Vergata Department of Economics and Finance

Marcus H. Miller

University of Warwick - Department of Economics; Institute for International Economics; Centre for Economic Policy Research (CEPR)

Lei Zhang

University of Warwick - Department of Economics

Date Written: February 2007

Abstract

In this paper we show how trading rules can generate excess volatility in the exchange rate through repeated entry and exit of currency bears and bulls. This is something of a caricature: but it allows us to show that offcial action can have self-fulfilling effects as market composition shifts in ways that support offcial stabilization. Intervention if and when the rate moves outside what Williamson has labelled 'monitoring bands' can reduce market volatility as the effect of the policy is to select endogenously traders from the market whose expectations match offcial intervention.

Keywords: Monitoring Rules, Monitoring Band, Bear and Bull Traders, Excess Volatility, Central Bank Volatility

JEL Classification: D52, F31, G12

Suggested Citation

Corrado, Luisa and Miller, Marcus H. and Zhang, Lei, Monitoring Bands and Monitoring Rules: How Currency Intervention Can Change Market Composition (February 2007). CEIS Working Paper No. 92. Available at SSRN: https://ssrn.com/abstract=962489 or http://dx.doi.org/10.2139/ssrn.962489

Luisa Corrado (Contact Author)

University of Rome Tor Vergata Department of Economics and Finance ( email )

Via Columbia n.2
Rome, rome 00100
Italy

Marcus H. Miller

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 3048/9 (Phone)
+44 24 7652 3032 (Fax)

Institute for International Economics

1750 Massachusetts Avenue, NW
Washington, DC 20036-1903
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Lei Zhang

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 2983 (Phone)
+44 24 7652 3032 (Fax)

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