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Classical and Impulse Stochastic Control of the Exchange Rate Using Interest Rates and Reserves

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  • Abel Cadenillas
  • Fernando Zapatero

Abstract

We consider the problem of a Central Bank that wants the exchange rate to be as close as possible to a given target, and in order to do that uses both the interest rate level and interventions in the foreign exchange market. We model this as a mixed classical‐impulse stochastic control problem, and provide for the first time a solution to that kind of problem. We give examples of solutions that allow us to perform an interesting economic analysis of the optimal strategy of the Central Bank.

Suggested Citation

  • Abel Cadenillas & Fernando Zapatero, 2000. "Classical and Impulse Stochastic Control of the Exchange Rate Using Interest Rates and Reserves," Mathematical Finance, Wiley Blackwell, vol. 10(2), pages 141-156, April.
    • Handle: RePEc:bla:mathfi:v:10:y:2000:i:2:p:141-156
    DOI: 10.1111/1467-9965.00086
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