Author: | Cadenillas, A. Zapatero, F. |
Title: | Optimal Central Bank intervention in the foreign exchange market |
Journal: | Journal of Economic Theory
1999 : JUL, VOL. 87:1, p. 218-242 |
Index terms: | Foreign exchange Markets Theories Banking Central banks Models |
Language: | eng |
Abstract: | In the paper, a currency with exchange rate dynamics modelled as a geometric Brownian motion is considered. The objective of the Central Bank is to keep this exchange rate as close as possible to a given target, so there is a running cost associated to the difference btw. the exchange rate and the target. The objective of this paper is to find the optimal level of intervention, and the optimal sizes of the interventions, so as to minimize the total cost. This problem is solved by applying the theory of stochastic impulse controls. |
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