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Modelling Foreign Exchange Interventions under Rayleigh Process: Applications to Swiss Franc Exchange Rate Dynamics

This paper models the foreign exchange intervention policy following the Rayleigh process derived from the standard flexible-price monetary framework. The exchange rate dynamics associated with the interventions are more sensitive to the change in the economic fundamental when a currency’s money sup...

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Autores principales: Hui, Cho-Hoi, Lo, Chi-Fai, Liu, Chi-Hei
Formato: Online Artículo Texto
Lenguaje:English
Publicado: MDPI 2022
Materias:
Acceso en línea:https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9320422/
https://www.ncbi.nlm.nih.gov/pubmed/35885111
http://dx.doi.org/10.3390/e24070888
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author Hui, Cho-Hoi
Lo, Chi-Fai
Liu, Chi-Hei
author_facet Hui, Cho-Hoi
Lo, Chi-Fai
Liu, Chi-Hei
author_sort Hui, Cho-Hoi
collection PubMed
description This paper models the foreign exchange intervention policy following the Rayleigh process derived from the standard flexible-price monetary framework. The exchange rate dynamics associated with the interventions are more sensitive to the change in the economic fundamental when a currency’s money supply is ample and its appreciation expectation cannot be offset by lower interest rates that have fallen to the zero lower bound, suggesting that more intensive interventions are required to counteract currency appreciation pressure and resulting in foreign reserve accumulation. The empirical results using market data during January 2015–February 2020 demonstrate that the model can describe the dynamics of the Swiss franc exchange rate. The accumulation of foreign reserves through interventions is negatively co-integrated with the exchange rate volatility and the value of the mean level of the Swiss franc exchange rate in the dynamics, to some extent indicating a reasonably high degree of effectiveness of the Swiss National Bank’s interventions. The transition between the target-zone and floating-rate regimes in 2015 caused changes in the level of exchange rate volatility but not its dynamical structure, suggesting that transitions between the floating-rate and target-zone regimes do not seem to have material consequence in this regard.
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spelling pubmed-93204222022-07-27 Modelling Foreign Exchange Interventions under Rayleigh Process: Applications to Swiss Franc Exchange Rate Dynamics Hui, Cho-Hoi Lo, Chi-Fai Liu, Chi-Hei Entropy (Basel) Article This paper models the foreign exchange intervention policy following the Rayleigh process derived from the standard flexible-price monetary framework. The exchange rate dynamics associated with the interventions are more sensitive to the change in the economic fundamental when a currency’s money supply is ample and its appreciation expectation cannot be offset by lower interest rates that have fallen to the zero lower bound, suggesting that more intensive interventions are required to counteract currency appreciation pressure and resulting in foreign reserve accumulation. The empirical results using market data during January 2015–February 2020 demonstrate that the model can describe the dynamics of the Swiss franc exchange rate. The accumulation of foreign reserves through interventions is negatively co-integrated with the exchange rate volatility and the value of the mean level of the Swiss franc exchange rate in the dynamics, to some extent indicating a reasonably high degree of effectiveness of the Swiss National Bank’s interventions. The transition between the target-zone and floating-rate regimes in 2015 caused changes in the level of exchange rate volatility but not its dynamical structure, suggesting that transitions between the floating-rate and target-zone regimes do not seem to have material consequence in this regard. MDPI 2022-06-28 /pmc/articles/PMC9320422/ /pubmed/35885111 http://dx.doi.org/10.3390/e24070888 Text en © 2022 by the authors. https://creativecommons.org/licenses/by/4.0/Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/licenses/by/4.0/).
spellingShingle Article
Hui, Cho-Hoi
Lo, Chi-Fai
Liu, Chi-Hei
Modelling Foreign Exchange Interventions under Rayleigh Process: Applications to Swiss Franc Exchange Rate Dynamics
title Modelling Foreign Exchange Interventions under Rayleigh Process: Applications to Swiss Franc Exchange Rate Dynamics
title_full Modelling Foreign Exchange Interventions under Rayleigh Process: Applications to Swiss Franc Exchange Rate Dynamics
title_fullStr Modelling Foreign Exchange Interventions under Rayleigh Process: Applications to Swiss Franc Exchange Rate Dynamics
title_full_unstemmed Modelling Foreign Exchange Interventions under Rayleigh Process: Applications to Swiss Franc Exchange Rate Dynamics
title_short Modelling Foreign Exchange Interventions under Rayleigh Process: Applications to Swiss Franc Exchange Rate Dynamics
title_sort modelling foreign exchange interventions under rayleigh process: applications to swiss franc exchange rate dynamics
topic Article
url https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9320422/
https://www.ncbi.nlm.nih.gov/pubmed/35885111
http://dx.doi.org/10.3390/e24070888
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