Realignment Expectations, Forward Rate Bias, and Sterilized Intervention in an Adjustable Peg Exchange Rate Model with Policy Optimization
February 1, 1994
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Summary
The paper models an adjustable peg exchange rate arrangement as a policy rule with an escape clause under which the timing and magnitudes of realignments are the outcomes of policy optimization decisions. Under the assumptions that market participants are rational, risk averse, and fully informed about the incentives of policymakers, the analysis focuses on the implications for relating realignment expectations to the state variables that enter the policy objective function, for modeling the bias in using forward exchange rates to predict future spot rates, and for characterizing the effectiveness of sterilized intervention.
Subject: Exchange rates, Foreign exchange, International reserves, Rational expectations, Return on investment
Keywords: exchange rate, WP
Pages:
32
Volume:
1994
DOI:
Issue:
020
Series:
Working Paper No. 1994/020
Stock No:
WPIEA0201994
ISBN:
9781451922042
ISSN:
1018-5941
Notes
Also published in Staff Papers, Vol. 41, No. 3, September 1994.
