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Central Bank Intervention and Heterogeneous Exchange Rate Expectations: Evidence from the Daily DEM/US-Dollar Exchange Rate

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  • Stefan Reitz

Abstract

In this paper we propose a generalisation of the noise trader transmission mechanism to examine the impact of central bank intervention on exchange rates. Within a heterogeneous expectation exchange rate model intervention operations are supposed to provide support for chartist or fundamentalist forecasts, which forces portfolio managers to adjust their foreign currency positions. The empirical examination of the hypothesis is done by applying a Markov regime-switching approach to daily DEM/US-dollar exchange rates and intervention data of the Deutsche Bundesbank and the Federal Reserve from 1979 to 1992. It is shown that chartist’s profits rose whenever these central banks intervened on the foreign exchange market. This is not true for those who follow a fundamentalist approach. Copyright Springer Science + Business Media, Inc. 2005

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  • Stefan Reitz, 2005. "Central Bank Intervention and Heterogeneous Exchange Rate Expectations: Evidence from the Daily DEM/US-Dollar Exchange Rate," Open Economies Review, Springer, vol. 16(1), pages 33-50, January.
    • Handle: RePEc:kap:openec:v:16:y:2005:i:1:p:33-50
    DOI: 10.1007/s11079-005-5331-2
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