Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153058
Authors: 
Coche, Joachim
Koivu, Matti
Nyholm, Ken
Poikonen, Vesa
Year of Publication: 
2006
Series/Report no.: 
ECB Working Paper 624
Abstract: 
This paper studies the implications of introducing an explicit policy objective to the management of foreign reserves at a central bank. A dynamic model is developed which links together reserves management and the exchange rate by foreign exchange interventions. The exchange rate is modelled as a mean-reverting autoregressive process incorporating a linear response to interventions. The premise is that it is the objective of the central bank to prevent undervaluation of its currency. Given this objective, the model is formulated in a one- and a multi-period setting and solved to find the optimal asset allocation. The results show that asset allocation can significantly help in achieving the desired policy objective.
Subjects: 
exchange rate modelling
foreign exchange intervention
Foreign reserves management
optimal asset allocation
JEL: 
G11
F31
Document Type: 
Working Paper

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