The impact of FX central bank intervention in a noise trading framework

In this paper, we analyse the effectiveness of the direct centralbankinterventions using a new effectiveness criterion. To this aim, we investigate the effects of centralbankinterventions (CBI) in anoisetrading model with chartists and fundamentalists. We first estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value. Then, we investigate the role of centralbankinterventions for explaining the switching properties between the two types of agents. We find evidence that in the medium run, interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate.