OFFICIAL FOREIGN EXCHANGE INTERVENTION AS A COORDINATING SIGNAL IN THE DOLLAR–YEN MARKET

In: Pacific economic review, Band 10, Heft 1, S. 73-82

Abstract

Abstract.  I examine the effectiveness of exchange rate intervention within the context of a Markov‐switching model for the real dollar–yen exchange rate over the period April 1991–December 2003. The probability of switching between stable and unstable regimes depends nonlinearly upon the amount of intervention, the degree of misalignment and the duration of the regime. I find that intervention increases the probability of stability when the rate is misaligned, and that its influence grows with the degree of misalignment. However, intervention within a small neighbourhood of equilibrium will result in a greater probability of instability.