Abstract
In a stochastic macroeconomic model, this paper studies the desirability of intervention in the forward exchange market to stabilize the spot rate from the short-run and long-run perspectives. Behavior of forward speculation is endogenized in the light of the Lucas critique. Numerical simulation suggests that such intervention is much less desirable in the long-run than in the short-run. Only when domestic monetary disturbance is present, such intervention may be desirable both in the short-run and in the long-run, provided that price adjustment is sufficiently elastic.
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Tseng, HK. Forward market intervention, endogenous speculation, and exchange rate variability. Atlantic Economic Journal 21, 37–55 (1993). https://doi.org/10.1007/BF02299774
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DOI: https://doi.org/10.1007/BF02299774