Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5068453 | European Journal of Political Economy | 2007 | 17 Pages |
This paper studies the effectiveness of foreign exchange rate targeting by a central bank in a market microstructure framework. Unlike the existing literature, where the intervening central bank either makes its target exchange rate public or hides it completely, we present a model that emphasizes the value of selectively disclosing intervention relevant information to some but not all market participants. We show that if the market's uncertainty over the central bank's target is sufficiently high and if the central bank is targeting the exchange rate away from its fundamental value (attempting to move the exchange rate in the opposite direction of where the fundamental based trade takes it) selectively disclosing the exchange rate target improves the effectiveness of the intervention.