TY  - JOUR
AU  - Eaton,Jonathan
AU  - Turnovsky,Stephen J.
TI  - The Forward Exchange Market, Speculation, and Exchange Market Intervention
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 1138
PY  - 1984
Y2  - November 1984
UR  - http://www.nber.org/papers/w1138
L1  - http://www.nber.org/papers/w1138.pdf
N1  - Author contact info:
Jonathan Eaton
Department of Economics
Penn State University
608 Kern Graduate Building
University Park, PA 16802-3306
Tel: (814) 865 - 8871
Fax: (814) 863 - 4775
E-Mail: jxe22@psu.edu

Stephen Turnovsky
Department of Economics
301 Savery Hall; Mail Stop DK 30
University of Washington
Seattle, WA   98195
Tel: 206-545-8028
E-Mail: sturn@u.washington.edu
AB  - 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.
ER  -