Journal of Optimization Theory and Applications

, Volume 128, Issue 2, pp 453–467

Target Zone Interventions and Coordination of Expectations

  • S. Reitz
  • F. Westerhoff
  • C. Wieland
Article

DOI: 10.1007/s10957-006-9027-6

Cite this article as:
Reitz, S., Westerhoff, F. & Wieland, C. J Optim Theory Appl (2006) 128: 453. doi:10.1007/s10957-006-9027-6

Abstract

Foreign exchange markets display regularly severe bubbles. This paper explores whether or not the so-called target zone interventions are an effective tool for central banks to stabilize the exchange rate. We define such intervention operations as buying/selling an undervalued/overvalued currency when the distance between the exchange rate and its fundamental value exceeds a critical threshold value. On the basis of a nonlinear empirical exchange rate model with chartists and fundamentalists, we find that not only target zone interventions have the power to reduce misalignments but also to earn profits.

Keywords

Foreign exchange markets technical and fundamental analysis heterogeneous agents central bank interventions 

Copyright information

© Springer Science+Business Media, Inc. 2006

Authors and Affiliations

  • S. Reitz
    • 1
  • F. Westerhoff
    • 2
  • C. Wieland
    • 3
  1. 1.International Business SchoolBrandeis UniversityWalthamUSA
  2. 2.Department of EconomicsUniversity of OsnabrueckOsnabrueckGermany
  3. 3.RAAD ConsultMuensterGermany

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