The Forward Exchange Market, Speculation, and Exchange Market Intervention

Jonathan Eaton, Stephen J. Turnovsky

NBER Working Paper No. 1138 (Also Reprint No. r0541)
Issued in June 1983
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

This paper develops a stochastic equilibrium model of an open economy incorporating speculation in the forward exchange market. The model is used to examine two issues. The first is the role of speculation in stabilizing the economy against stochastic disturbances. Much risk averse speculation stabilizes domestic income against disturbances in the domestic bond market and forward exchange marketbut exacerbates the effect of foreign disturbances. Speculation may dampen or augment the effect of money market and output supply disturbances depending upon the share of foreign bonds in total wealthand the interest elasticity of bond demand. The second issue that the model addresses is the role of the forward market in stabilization policy. Forward market intervention (or its equivalent in this model,sterilized spot market intervention) does not provide monetary authorities additional leverage in stabilizing income beyond unsterilized spot market intervention. Intervention rules based on reactions to both the forward and the spot exchange rates, however, can outper-form intervention policies responding to the spot rate alone,regardless of the market in which intervention occurs.

download in pdf format
   (348 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1138

Published: Eaton, Jonathan and Stephen J. Turnovsky. "The Forward Exchange Market, Speculation, and Exchange Market Intervention." Quarterly Journal of Economics , Vol. 99, No. 1, (February 1984), pp. 45-69. John Wilely and Sons. citation courtesy of

Users who downloaded this paper also downloaded* these:
Hansen and Hodrick Risk Averse Speculation in the Forward Foreign Exchange Market: An Econometric Analysis of Linear Models
Mussa The Theory of Exchange Rate Determination
Frankel and Poonawala w12496 The Forward Market in Emerging Currencies: Less Biased Than in Major Currencies
Agrawal, Catalini, and Goldfarb w16820 The Geography of Crowdfunding
Bordo The Bretton Woods International Monetary System: A Historical Overview
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us