Monitoring Bands and Monitoring Rules: how currency intervention can change market composition

Zhang LeiCorrado LuisaMiller Marcus H.
CEIS Research Paper
In this paper we show how trading rules can generate excess volatility in the exchange rate through repeated entry and exit of currency "bears" and "bulls". This is something of a caricature: but it allows us to show that official action can have self-ful.lling e¤ects as market composition shifts in ways that support official stabilization. Intervention if and when the rate moves outside what Williamson has labelled "monitoring bands" can reduce market volatility as the effect of the policy is to select endogenously traders from the market whose expectations match official intervention.
Number: 91
Keywords: Monitoring Rules, Monitoring Band, Bear and Bull Traders, Excess Volatility, Central Bank Volatility
JEL codes: D52, F31, G12
Date: Tuesday, February 20, 2007
Revision Date: Tuesday, February 20, 2007