OFFICIAL FOREIGN EXCHANGE INTERVENTION AS A COORDINATING SIGNAL IN THE DOLLAR-YEN MARKET

I examine the effectiveness of exchange rate intervention within the context of a Markov-switching model for the real dollar-yen exchange rate over the period April 1991-December 2003. The probability of switching between stable and unstable regimes depends nonlinearly upon the amount of intervention, the degree of misalignment and the duration of the regime. I find that intervention increases the probability of stability when the rate is misaligned, and that its influence grows with the degree of misalignment. However, intervention within a small neighbourhood of equilibrium will result in a greater probability of instability. Copyright 2005 Blackwell Publishing Ltd