Sterilized Foreign Exchange Market Interventions in a Chartist-Fundamentalist Exchange Rate Model
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Sterilized Foreign Exchange Market Interventions in a Chartist-Fundamentalist Exchange Rate Model
Schmidt, Robert | Wollmershäuser, Timo
Credit and Capital Markets – Kredit und Kapital, Vol. 38 (2005), Iss. 1 : pp. 53–85
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Robert Schmidt, Würzburg
Timo Wollmershäuser, München
References
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Abstract
Sterilized foreign exchange market interventions are commonly dismissed by economists as an ineffective policy instrument - despite its frequent use by many central banks. We argue that the skepticism of many economists can be ascribed to their orientation on fundamentals-based, efficient-market exchange rate models. Given their weak empirical support, however, it is unreasonable to evaluate the effectiveness of sterilized foreign exchange interventions on this basis. The purpose of this paper is to investigate the effectiveness of sterilized foreign exchange market interventions using a chartist-fundamentalist model. We show that turning points occur earlier and that exchange rate misalignments are substantially reduced. (JEL D84, E58, F31)