TY  - JOUR
AU  - Lewis,Karen K.
TI  - Occasional Interventions to Target Rates with a Foreign Exchange        Application
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3398
PY  - 1990
Y2  - July 1990
UR  - http://www.nber.org/papers/w3398
L1  - http://www.nber.org/papers/w3398.pdf
N1  - Author contact info:
Karen K. Lewis
Department of Finance, Wharton School
2300 SHDH
University of Pennsylvania
Philadelphia, PA 19104-6367
Tel: 215/898-7637
Fax: 215/898-6200
E-Mail: lewisk@wharton.upenn.edu
AB  - This paper develops a framework for analyzing the effects upon rates when occasional central bank interventions try to keep rates near target levels. Interestingly, the threat of capital gains or losses induced by this stochastic intervention policy helps contain rates within implicit boundaries around the target level. More importantly, this intervention policy concentrates observations of the exchange rate around the target level and away from the implicit bands. In Monte Carlo simulations, sufficiently tight distributions for intervention around the target level imply that the bands are never reached in practice. As an application, the model is empirically evaluated using exchange rate and intervention observations following the 1987 Louvre accord. In these estimates, the probability of intervention never exceeds more than about .5 while the range of observed exchange rates remain far away from the implicit bands where the probability of intervention is one.
ER  -