Realignment Expectations, Forward Rate Bias, and Sterilized Intervention in an Adjustable Peg Exchange Rate Model with Policy Optimization

Author/Editor:

Peter Isard

Publication Date:

February 1, 1994

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Series:

Working Paper No. 1994/020

Subject:

Exchange rates Foreign exchange International reserves Rational expectations Return on investment

Notes:

Also published in Staff Papers, Vol. 41, No. 3, September 1994.

English

Publication Date:

February 1, 1994

ISBN/ISSN:

9781451922042/1018-5941

Stock No:

WPIEA0201994

Pages:

32

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