Taylor, Mark P., 1958- (2003) Is official exchange rate intervention effective? Discussion Paper. London: Centre for Economic Policy Research (Great Britain). (Discussion paper (Centre for Economic Policy Research (Great Britain)).

Preview

PDF WRAP_Taylor_CEPR-DP3758[1].pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader Download (218Kb)

Abstract

I examine the effectiveness of exchange rate intervention within the context of a Markov-switching model for the real exchange rate. The probability of switching between stable and unstable regimes depends non-linearly upon the amount of intervention, the degree of misalignment and the duration of the regime. Applying this to dollar-mark data for the period 1985-98, I find that intervention increases the probability of stability when the rate is misaligned, and that its influence grows with the degree of misalignment. Intervention within a small neighbourhood of equilibrium will result in a greater probability of instability.

Item Type:	Working or Discussion Paper (Discussion Paper)
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Foreign exchange rates -- Government policy, Markov processes, Economic policy, Nonlinear theories
Series Name:	Discussion paper (Centre for Economic Policy Research (Great Britain))
Publisher:	Centre for Economic Policy Research (Great Britain)
Place of Publication:	London
Date:	February 2003
Number:	No.375
Number of Pages:	16
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Leverhulme Trust (LT)
References:	Allen, Helen, and Mark P. Taylor (1990), “Charts, Noise and Fundamentals in the Foreign Exchange Market,” Economic Journal, 100, pp. 49-59. Bai, Jushan., and Pierre Perron (1998), “Estimating and Testing LinearModels with Multiple Structural Changes”, Econometrica, 66, pp. 47-8. Bai, Jushan., and Pierre Perron (2000), “Multiple Structural Change Models: A Simulation Analysis”, mimeo, Department of Economics, Boston University. Bai, Jushan., and Pierre Perron (2001a), “Computation and Analysis of Multiple Structural ChangeModels”, mimeo, Department of Economics, Boston University. Bai, Jushan., and Pierre Perron (2001b), “Additional Critical Values for Multiple Structural Change Tests”, mimeo, Department of Economics, Boston University. Clarida, Richard H., Lucio Sarno, Mark P. Taylor and Giorgio Valente (2002), “The Out-of-Sample Success of Term Structure Models as Exchange Rate Predictors: A Step Beyond”, National Bureau of Economic Research Discussion Paper (forthcoming, Journal of International Economics). Coakley, Jerry, and Ana-Maria Fuertes (2000), “Short Run Dynamics of Real Exchange Rates”, The Manchester School, 68, pp. 461-475. Coakley, Jerry and Ana-Maria Fuertes (2001), “A Nonlinear Analysis of Excess Foreign Exchange Returns”, The Manchester School, 69, pp. 623-642. Coakley, Jerry, Ana-Maria Fuertes and M.T. Perez (2001), “Numerical Issues in Threshold Autoregressive Modelling of Time Series”, mimeo, University of Essex (forthcoming, Journal of Economic Dynamics and Control). Cochran, Steven J. and Robert H. De…na (1995), “Duration Dependence in the US Stock Market Cycle: A Parametric Approach”, Applied Financial Economics, 5, pp. 309-18. Curcio, Riccardo, Charles A.E. Goodhart, Dominique Guillaume and Richard Payne(1997), “Do Technical Trading Rules Generate Pro…ts? Conclusions from the Intra-day Foreign Exchange Market”, International Journal of Finance and Economics, 2, pp. 267-80. Diebold, Francis X., Joon-Haeng Lee and Gretchen C.Weinbach (1994), “Regime Switching with Time-Varying Transition Probabilities”, in Colin Hargreaves (ed.) Nonstationary Time Series Analysis and Cointegration, Oxford and New York: Oxford University Press, pp. 283-302. 11 Dominguez, Kathryn M. and Je¤rey A. Frankel (1993a), Does Foreign Exchange Intervention Work?, Washington, D.C.: Institute for International Economics. Dominguez, Kathryn M. and Je¤rey A. Frankel, Je¤rey A. (1993b), “Does Foreign Exchange Intervention Matter? The Portfolio E¤ect,” American Economic Review, 83, pp. 1356-69. Dominguez, Kathryn M. and Je¤rey A. Frankel (1993c), “Foreign Exchange Intervention: An Empirical Assessment,” in Frankel (1993), pp.327-45. Durland, J. Michael, and Thomas H. McCurdy, (1994), “Duration-Dependent Transitions in a Markov Model of US GNP Growth”, Journal of Business and Economic Statistics, 12, pp. 279-88. Filardo, A.J. (1994), “Business-Cycle Phases and Their Transitional Dynamics”, Journal of Business and Economic Statistics, 12, pp. 299-308 Frankel, Je¤rey.A.(ed.) (1993), On Exchange Rates. Cambridge, Mass: MIT Press. Frankel, Je¤rey.A., and Kenneth A. Froot (1986), “Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists”, Economic Record, Supplement, pp. 24-38. (Reprinted in Frankel, 1993, pp. 295-316.) Frankel, Je¤rey.A., and Kenneth A. Froot (1990a), “Chartists, Fundamentalists, and Trading in the Foreign Exchange Market”, American Economic Review, 80, pp. 181-5. (Reprinted in Frankel, 1993, pp. 317-26.) Frankel, Je¤rey.A., and Kenneth A. Froot (1990b), “Chartists, Fundamentalists and the Demand for Dollars,” in Anthony.S. Courakis and Mark.P. Taylor (eds.) Private Behaviour and Government Policies in Interdependent Economies, Oxford: Oxford University Press, 1990. Kilian, Lutz, and Mark P. Taylor (2002) “Why Is It So Di¢cult to Beat the Random Walk Forecast of Exchange Rates?”, Centre for Economic Policy Research Discussion Paper (forthcoming, Journal of International Economics). Levin, Jay H. (1997), “Chartists, Fundamentalists and Exchange Rate Dynamics”, International Journal of Finance and Economics, 2, pp. 281-90. McQueen, Grant, and Steven. Thorley (1994), “Bubbles, Stock Returns, and Duration Dependence”, Journal of Financial and Quantitative Analysis, 29, pp. 379-401. Maheu, John M., and Thomas H. McCurdy (2000), “Identifying Bull and Bear Markets in Stock Returns”, Journal of Business and Economic Statistics, 18, pp. 100-112. 12 Menkho¤, Lukas (1997), “Examining the Use of Technical Currency Analysis”’, International Journal of Finance and Economics, 2, pp. 307-18. Peel, David A., and Alan Speight, (1997), “Nonlinearities in East European Black Market Exchange Rates”, International Journal of Finance and Economics, 2, pp. 39-57. Peel, David A., and Alan Speight (1998), “Modelling Business Cycle Nonlinearity in Conditional Mean and Conditional Variance: Some International Evidence”, Economica, 65, pp. 211-229. Sarno, Lucio, and Mark P. Taylor (2001), “O¢cial Intervention in the Foreign Exchange Market: Is It E¤ective and, If So, How Does ItWork?” Journal of Economic Literature Papers, 39, pp. 839-68. Sarno, Lucio, and Mark P. Taylor (2002), “Purchasing Power Parity and the Real Exchange Rate” International Monetary Fund Sta¤ Papers, 49, pp. 65-105. Sarno, Lucio, and Mark P. Taylor (2003), The Economics of Exchange Rates. Cambridge and New York: Cambridge University Press. Shleifer, Andrei, and Robert W. Vishny (1997), “The Limits of Arbitrage”, Journal of Finance, 52, pp. 35-55 Taylor, Mark P. (1997), “Special Issue on Technical Analysis and Financial Markets: Editor’s Introduction”, International Journal of Finance and Economics, 2, pp. 263-66. Taylor, Mark P., and Helen Allen (1992), “The Use of Technical Analysis in the Foreign Exchange Market”, Journal of International Money and Finance, 11, pp. 304-314. Taylor, Mark P., David A. Peel and Lucio Sarno (2001), “Nonlinear Mean Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles,” International Economic Review, 42, pp. 1015-42. Taylor, Mark P. (2002), “Purchasing Power Parity”, mimeo, Department of Economics, Warwick University (forthcoming, Review of International Economics). Vigfusson, Robert (1997), “Switching between Chartists and Fundamentalists: A Markov Regime-Switching Approach”, International Journal of Finance and Economics, 2, p. 291-305.Allen, Helen, and Mark P. Taylor (1990), “Charts, Noise and Fundamentals in the Foreign Exchange Market,” Economic Journal, 100, pp. 49-59. Bai, Jushan., and Pierre Perron (1998), “Estimating and Testing Linear Models with Multiple Structural Changes”, Econometrica, 66, pp. 47-8. Bai, Jushan., and Pierre Perron (2000), “Multiple Structural Change Models: A Simulation Analysis”, mimeo, Department of Economics, Boston University. Bai, Jushan., and Pierre Perron (2001a), “Computation and Analysis of Multiple Structural Change Models”, mimeo, Department of Economics, Boston University. Bai, Jushan., and Pierre Perron (2001b), “Additional Critical Values for Multiple Structural Change Tests”, mimeo, Department of Economics, Boston University. Clarida, Richard H., Lucio Sarno, Mark P. Taylor and Giorgio Valente (2002), “The Out-of-Sample Success of Term Structure Models as Exchange Rate Predictors: A Step Beyond”, National Bureau of Economic Research Discussion Paper (forthcoming, Journal of International Economics). Coakley, Jerry, and Ana-Maria Fuertes (2000), “Short Run Dynamics of Real Exchange Rates”, The Manchester School, 68, pp. 461-475. Coakley, Jerry and Ana-Maria Fuertes (2001), “A Nonlinear Analysis of Excess Foreign Exchange Returns”, The Manchester School, 69, pp. 623-642. Coakley, Jerry, Ana-Maria Fuertes and M.T. Perez (2001), “Numerical Issues in Threshold Autoregressive Modelling of Time Series”, mimeo, University of Essex (forthcoming, Journal of Economic Dynamics and Control). Cochran, Steven J. and Robert H. De…na (1995), “Duration Dependence in the US Stock Market Cycle: A Parametric Approach”, Applied Financial Economics, 5, pp. 309-18. Curcio, Riccardo, Charles A.E. Goodhart, Dominique Guillaume and Richard Payne(1997), “Do Technical Trading Rules Generate Pro…ts? Conclusions from the Intra-day Foreign Exchange Market”, International Journal of Finance and Economics, 2, pp. 267-80. Diebold, Francis X., Joon-Haeng Lee and Gretchen C.Weinbach (1994), “Regime Switching with Time-Varying Transition Probabilities”, in Colin Hargreaves (ed.) Nonstationary Time Series Analysis and Cointegration, Oxford and New York: Oxford University Press, pp. 283-302. Dominguez, Kathryn M. and Je¤rey A. Frankel (1993a), Does Foreign Exchange Intervention Work?, Washington, D.C.: Institute for International Economics. Dominguez, Kathryn M. and Je¤rey A. Frankel, Je¤rey A. (1993b), “Does Foreign Exchange Intervention Matter? The Portfolio E¤ect,” American Economic Review, 83, pp. 1356-69. Dominguez, Kathryn M. and Jeffrey A. Frankel (1993c), “Foreign Exchange Intervention: An Empirical Assessment,” in Frankel (1993), pp.327-45. Durland, J. Michael, and Thomas H. McCurdy, (1994), “Duration-Dependent Transitions in a Markov Model of US GNP Growth”, Journal of Business and Economic Statistics, 12, pp. 279-88. Filardo, A.J. (1994), “Business-Cycle Phases and Their Transitional Dynamics”, Journal of Business and Economic Statistics, 12, pp. 299-308 Frankel, Jeffrey.A.(ed.) (1993), On Exchange Rates. Cambridge, Mass: MIT Press. Frankel, Jeffrey.A., and Kenneth A. Froot (1986), “Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists”, Economic Record, Supplement, pp. 24-38. (Reprinted in Frankel, 1993, pp. 295-316.) Frankel, Jeffrey.A., and Kenneth A. Froot (1990a), “Chartists, Fundamentalists, and Trading in the Foreign Exchange Market”, American Economic Review, 80, pp. 181-5. (Reprinted in Frankel, 1993, pp. 317-26.) Frankel, Jeffrey.A., and Kenneth A. Froot (1990b), “Chartists, Fundamentalists and the Demand for Dollars,” in Anthony.S. Courakis and Mark.P. Taylor (eds.) Private Behaviour and Government Policies in Interdependent Economies, Oxford: Oxford University Press, 1990. Kilian, Lutz, and Mark P. Taylor (2002) “Why Is It So Difficult to Beat the Random Walk Forecast of Exchange Rates?”, Centre for Economic Policy Research Discussion Paper (forthcoming, Journal of International Economics). Levin, Jay H. (1997), “Chartists, Fundamentalists and Exchange Rate Dynamics”, International Journal of Finance and Economics, 2, pp. 281-90. McQueen, Grant, and Steven. Thorley (1994), “Bubbles, Stock Returns, and Duration Dependence”, Journal of Financial and Quantitative Analysis, 29, pp. 379-401. Maheu, John M., and Thomas H. McCurdy (2000), “Identifying Bull and Bear Markets in Stock Returns”, Journal of Business and Economic Statistics, 18, pp. 100-112. Menkhoff, Lukas (1997), “Examining the Use of Technical Currency Analysis”’, International Journal of Finance and Economics, 2, pp. 307-18. Peel, David A., and Alan Speight, (1997), “Nonlinearities in East European Black Market Exchange Rates”, International Journal of Finance and Economics, 2, pp. 39-57. Peel, David A., and Alan Speight (1998), “Modelling Business Cycle Nonlinearity in Conditional Mean and Conditional Variance: Some International Evidence”, Economica, 65, pp. 211-229. Sarno, Lucio, and Mark P. Taylor (2001), “Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?” Journal of Economic Literature Papers, 39, pp. 839-68. Sarno, Lucio, and Mark P. Taylor (2002), “Purchasing Power Parity and the Real Exchange Rate” International Monetary Fund Sta¤ Papers, 49, pp. 65-105. Sarno, Lucio, and Mark P. Taylor (2003), The Economics of Exchange Rates. Cambridge and New York: Cambridge University Press. Shleifer, Andrei, and Robert W. Vishny (1997), “The Limits of Arbitrage”, Journal of Finance, 52, pp. 35-55 Taylor, Mark P. (1997), “Special Issue on Technical Analysis and Financial Markets: Editor’s Introduction”, International Journal of Finance and Economics, 2, pp. 263-66. Taylor, Mark P., and Helen Allen (1992), “The Use of Technical Analysis in the Foreign Exchange Market”, Journal of International Money and Finance, 11, pp. 304-314. Taylor, Mark P., David A. Peel and Lucio Sarno (2001), “Nonlinear Mean Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles,” International Economic Review, 42, pp. 1015-42. Taylor, Mark P. (2002), “Purchasing Power Parity”, mimeo, Department of Economics, Warwick University (forthcoming, Review of International Economics). Vigfusson, Robert (1997), “Switching between Chartists and Fundamentalists: A Markov Regime-Switching Approach”, International Journal of Finance and Economics, 2, p. 291-305.
URI:	http://wrap.warwick.ac.uk/id/eprint/1679

Request changes to a record

Actions (login required)

View Item