A structural threshold model of the exchange rate under optimal intervention

Lee, Hsiu-Yun; Lai, Hung-pin

doi:10.1016/j.jimonfin.2011.06.016

Cited by 6 publications

(2 citation statements)

References 34 publications

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“…This standard quadratic loss function can only describe the linear target of the central bank but it cannot describe the nonlinear target and range preference of the central bank in the foreign exchange market. Continuous linear intervention of the central bank brings large policy costs and political costs [25,26], so there is nonlinear intervention range in the central bank in theory.…”

Section: Derivation Of Range Intervention Function Model By Central Bankmentioning

confidence: 99%

Nonlinear Relationship based on Range Quadratic Loss Function

Sun

2020

Applied Mathematics and Nonlinear Sciences

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This paper uses the interval quadratic preference loss function to establish the threshold model of exchange rate volatility by Taylor series expansion, and GMM method to study the intervention behavior of exchange rate. It found that the central bank has asymmetric intervention preference for exchange rate, discontinuous and nonlinear intervention for exchange rate, and there is an intervention threshold, and the central bank has a certain degree of “fear of appreciation” trend. To some extent, asymmetric interval intervention preference has resulted in the rapid growth of China's foreign exchange reserves.

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Section: Derivation Of Range Intervention Function Model By Central Bankmentioning

confidence: 99%

Nonlinear Relationship based on Range Quadratic Loss Function

Sun

2020

Applied Mathematics and Nonlinear Sciences

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“…3 3 That advanced economies sterilize their intervention is mentioned in Lecourt and Raymond (2006). Many emerging market countries, such as Korea (Kim, Kim, and Wang 2004), Taiwan (Lee and Lai 2011), Indonesia, Thailand, and Malaysia (Fane 2005), and the Czech Republic, Hungary, Romania, Slovakia, and Turkey (Égert 2007), also sterilize their intervention. …”

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Can Secret Intervention Be Compatible With a Non‐profitmaking Central Bank and a Fundamental‐consistent Target?

Lee¹

2011

Contemporary Economic Policy

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The coexistence of secret intervention operations and “the signaling channel” (Mussa. The Role of Official Intervention, 1981) seems confusing. Vitale ( Journal of International Economics, 49, 1999, 245–267) resolves this puzzle by employing an asymmetric information framework and an assumption of a fundamental‐inconsistent target for the exchange rate. Ferré and Manzano ( International Journal of Finance and Economics, 14, 2009, 378–393) follow Vitale's microstructure framework and argue that the central banks' profitability motivation offers a rationale for their secret intervention even under a target consistent with the fundamentals. However, that the authority uses its superior information to obtain speculative profits through secret intervention in the market is not a typical goal for central banks. To theoretically explain the opaqueness in non‐profitmaking central banks' exchange rate policies, we employ a model of a central bank's optimization by considering that no bank really knows the exact fundamental rate and they take into account the possible bad consequences of announcing the intervention. We also show that, in passing the bank's private information to market participants, a bank's announcement of the intervention size is equivalent to revealing its target rate. (JEL E58, F39)

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