FOREIGN EXCHANGE EXPECTATIONS IN INDONESIA: REGIME SWITCHING CHARTISTS AND FUNDAMENTALISTS APPROACH
Keywords:
exhange rates, foreign-exchange intervention, switching regression
Abstract
In this research, the effect of central bank intervention within a heterogeneous expectation exchange rate model is investigated. The results are supporting both chartists and fundamentalist regimes. In the period investigated, chartist dominates in determining the exchange rate. While BI foreign exchange intervention can effectively push the market exchange-rate to its long-run fundamental equilibrium, however, Bank Indonesia’s effort to exert a stabilizing effect of foreign exchange interventions, the result does not show a success.Downloads
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References
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Almekinders, G. J., & Sylvester, C. W. (1996). A Friction Model of Daily Bundesbank and Federal Reserve Intervention. Journal of Banking and Finance 20, 1365-1380.
Baillie, R., & Osterberg, W. (1997a). Central Bank Intervention and Risk in the Forward Market. Journal of International Economics, Vol. 43, 483– 497.
Baillie, R., & Osterberg, W. (1997b). Why Do Central Banks Intervene?. Journal of International Money and Finance Vol 16, 909–919.
Beine, M., Grauwe, P. D., Grimaldi,M.(2009). The Impact of FX Central Bank Intervention in a Noise Trading Framework. Journal of Banking & Finance,33(7), 1187–1195.
Brunetti C, Mariano R. S., Scotti, C. (2007). Markov Switching GARCH Models of Currency Turmoil in Shoutheast Asia. Emerging Markets Reiview, Elsevier. 9(2):104-128.
Calvo, G. A., & Reinhart, C. M. (2000). Fear of Floating. Quarterly Journal Economics 117 , 379-408.
Clarida, R. H., Sarno, L., Taylor, M. P., Valente, G. (2001). The Out-of Sample Success of Term Structure Models as Exchange Rate Predictors: A Step Beyond, Mimeo.
Dewachter, H. (1996). Charts as Signals in Markov Switching World. Applied Economics Letters, Taylor and Francis Journals, 3 (6), 405-407.
Dewachter, H. (2001). Can Markov Switching Models Replicate Chartist Profits in the Foreign Exchange Market?. Journal of International Money and Finance, Vol.20,25-41.
Dominguez, K. M. (1998). Central Bank Intervention and Exchange Rate Volatility. USA: Journal of International Money and Finance, 17.
Dominguez, K. M., & Frankel, J. A. (1993). Does Foreign-Exchange Intervention Matter? the Portfolio Effect . The American Economic Review, 83 (5), 1356–1369.
Engel, C. H. (1994). Can the Markov Switching Model Forecast Exchange Rates?. Journal of International Economics, Vol. 36, 151 – 165.
Engel, C. H., & Hamilton, J. (1990). Long Swings in the Dollar: Are They in the Data and Do Markets Know It? . American Economic Review Vol. 80,689 – 713.
Frankel, J. A., & Froot, K. A. (1990). Chartist, Fundamentalists, and Trading in the Foreign Exchange Market. The American Economic Review, Vol. 80, No. 2 Papers and Proceedings of the Hundred and Second Annual Meeting of the American Economic Association, 181- 185.
Frankel, J. A., & Froot, K. A. (1989). Chartists, Fundamentalists, and Trading in the Foreign Exchange Market. American Economic Review Papers and Proceedings, Vol.80,181-185.
Frankel, J. A., & Froot, K. A. (1988). Forward Discount Bias: Is It an Exchange Risk Premium? Barkeley, California: Working Paper 8874 Department of Economics.
Frankel, J. A., & Froot, K. A. (1986). Understanding the US Dollar in the Eighties: The Expectations of Chartists and Fundamentalists. The Economic Record, 24 – 38.
Frankel, J. A., Schmukler, S. L., & Serven, L. (2004). Global Transmission of Interest Rates: Monetary Independence and Currency Regime. Journal of International Money and Finance Volume 23, Issue 5, 701-733.
Hamilton, J. D. (1989). A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle. Econometrica .
Hung, J. (1997). Intervention Strategies and Exchange Rate Volatility: A Noise Trading Perspective. Journal of International Money and Finance, Vol. 16 , 779 – 793.
Ito, T., &Yabu, T. (2007). What Prompts Japan to Intervence in the Forex Market? A New Approach to A Reaction Function. Journal of International Money and Finance Volume 26,Issue 2, 193-212.
Lewis, K. (1989). Can Learning Affect Exchange-Rate Behavior? – The Case of the Dollar in the Early 1980‘s. Journal of Monetary Economics, 79 – 100.
Maatoug, A. B., Fatnassi, I., Omri, A. (2010). Central Bank Intervention Within a Chartist- Fundamental Exchange Rate Model: Evidence from the RBA Case. Journal of Economic and Financial Modelling. 1(1):30-34.
Neely, C., & Weller, P. (2001). Technical Analysis and Central Bank Intervention . Journal of International Money and Finance, Vol. 20, 949 – 970.
Reitz, S. (2002). Central Bank Intervention and Exchange Rate Expectations – Evidence from the Daily DM/US-Dollar Exchange Rate. Discussion Paper 17/02. Economic Research Centre of the Deutsche Bundesbank.
Reitz, S., & Taylor, M. P. (2008). The Coordination Channel of Foreign Exchange Intervention: A Nonlinear Microstructural Analysis. European Economic Review. 52 (1), 55 – 76.
Röthig, A., Semmler, W., Flaschel, P. (2005). Corporate Currency Hedging and Currency Crises. Publications of Darmstadt Technical University, Institute of Economics (VWL) 27194,
Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
Stone, M., Roger, S., Shimizu, S., Nordstrom, A., Kisinbay, T., Restrepo, J. (2009). The Role of the Exchange Rate in Inflation-Targeting Emerging Economies. Washington: IMF Occasional Paper 267 (Washington: International Monetary Fund).
Takagi, S. (1991). Exchange Rate Expectations, A Survey of Survey Studies. IMF Staff Papers,Vol. 38 (1).
Taylor, J. B. (2001). The Role of the Exchange Rate in Monetary-Policy Rules. American Economic Review. 91 (2), 263-267.
Taylor, M. P. (2004). Is Official Exchange Rate Intervention Effective? . Economica, 71. The London School of Economics and Political Science, 1-11.
Taylor, M. P. (2000). Nonlinear Adjustment, Long Run Equilibrium and Exchange Rate Fundamentals . Journal of International Money and Finance, 19, 33-53.
Taylor, M. P. (2005). Official Foreign Exchange Intervention as A Coordinating Signal in the Dollar-Yen Market . Pacific Economic Review, 10 (1), 73–82.
Taylor, M. P. (1995). The Economics of Exchange Rates . Journal of Economic Literature Vigfusson, R. (1996). Switching Between Chartists and Fundamentalists: A Markov Regime- Switching Approach. Working Paper 96-1. Bank of Canada.
Warjiyo, P. 2013. Indonesia: Stabilizing the Exchange rate along Its Fundamental. BIS Paper no. 73. Bank for Internatioanal Settlements.
Westerhoff, F. (2003). Speculative Markets and the Effectiveness of Price Limits. Journal of Economic Dynamics and Control, 28, 493-508.
White, H. (1982). Maximum Likelihood Estimation of Misspecified Models . Econometrica, Vol.50, 1–25.
Wieland, C., & Westerhoff, F. (2005). Exchange Rate Dynamics, Central Bank Interventionand Chaos Control Methods. Journal of Economics Behavior and Organization, 58, 117-132.
Almekinders, G. J., & Sylvester, C. W. (1996). A Friction Model of Daily Bundesbank and Federal Reserve Intervention. Journal of Banking and Finance 20, 1365-1380.
Baillie, R., & Osterberg, W. (1997a). Central Bank Intervention and Risk in the Forward Market. Journal of International Economics, Vol. 43, 483– 497.
Baillie, R., & Osterberg, W. (1997b). Why Do Central Banks Intervene?. Journal of International Money and Finance Vol 16, 909–919.
Beine, M., Grauwe, P. D., Grimaldi,M.(2009). The Impact of FX Central Bank Intervention in a Noise Trading Framework. Journal of Banking & Finance,33(7), 1187–1195.
Brunetti C, Mariano R. S., Scotti, C. (2007). Markov Switching GARCH Models of Currency Turmoil in Shoutheast Asia. Emerging Markets Reiview, Elsevier. 9(2):104-128.
Calvo, G. A., & Reinhart, C. M. (2000). Fear of Floating. Quarterly Journal Economics 117 , 379-408.
Clarida, R. H., Sarno, L., Taylor, M. P., Valente, G. (2001). The Out-of Sample Success of Term Structure Models as Exchange Rate Predictors: A Step Beyond, Mimeo.
Dewachter, H. (1996). Charts as Signals in Markov Switching World. Applied Economics Letters, Taylor and Francis Journals, 3 (6), 405-407.
Dewachter, H. (2001). Can Markov Switching Models Replicate Chartist Profits in the Foreign Exchange Market?. Journal of International Money and Finance, Vol.20,25-41.
Dominguez, K. M. (1998). Central Bank Intervention and Exchange Rate Volatility. USA: Journal of International Money and Finance, 17.
Dominguez, K. M., & Frankel, J. A. (1993). Does Foreign-Exchange Intervention Matter? the Portfolio Effect . The American Economic Review, 83 (5), 1356–1369.
Engel, C. H. (1994). Can the Markov Switching Model Forecast Exchange Rates?. Journal of International Economics, Vol. 36, 151 – 165.
Engel, C. H., & Hamilton, J. (1990). Long Swings in the Dollar: Are They in the Data and Do Markets Know It? . American Economic Review Vol. 80,689 – 713.
Frankel, J. A., & Froot, K. A. (1990). Chartist, Fundamentalists, and Trading in the Foreign Exchange Market. The American Economic Review, Vol. 80, No. 2 Papers and Proceedings of the Hundred and Second Annual Meeting of the American Economic Association, 181- 185.
Frankel, J. A., & Froot, K. A. (1989). Chartists, Fundamentalists, and Trading in the Foreign Exchange Market. American Economic Review Papers and Proceedings, Vol.80,181-185.
Frankel, J. A., & Froot, K. A. (1988). Forward Discount Bias: Is It an Exchange Risk Premium? Barkeley, California: Working Paper 8874 Department of Economics.
Frankel, J. A., & Froot, K. A. (1986). Understanding the US Dollar in the Eighties: The Expectations of Chartists and Fundamentalists. The Economic Record, 24 – 38.
Frankel, J. A., Schmukler, S. L., & Serven, L. (2004). Global Transmission of Interest Rates: Monetary Independence and Currency Regime. Journal of International Money and Finance Volume 23, Issue 5, 701-733.
Hamilton, J. D. (1989). A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle. Econometrica .
Hung, J. (1997). Intervention Strategies and Exchange Rate Volatility: A Noise Trading Perspective. Journal of International Money and Finance, Vol. 16 , 779 – 793.
Ito, T., &Yabu, T. (2007). What Prompts Japan to Intervence in the Forex Market? A New Approach to A Reaction Function. Journal of International Money and Finance Volume 26,Issue 2, 193-212.
Lewis, K. (1989). Can Learning Affect Exchange-Rate Behavior? – The Case of the Dollar in the Early 1980‘s. Journal of Monetary Economics, 79 – 100.
Maatoug, A. B., Fatnassi, I., Omri, A. (2010). Central Bank Intervention Within a Chartist- Fundamental Exchange Rate Model: Evidence from the RBA Case. Journal of Economic and Financial Modelling. 1(1):30-34.
Neely, C., & Weller, P. (2001). Technical Analysis and Central Bank Intervention . Journal of International Money and Finance, Vol. 20, 949 – 970.
Reitz, S. (2002). Central Bank Intervention and Exchange Rate Expectations – Evidence from the Daily DM/US-Dollar Exchange Rate. Discussion Paper 17/02. Economic Research Centre of the Deutsche Bundesbank.
Reitz, S., & Taylor, M. P. (2008). The Coordination Channel of Foreign Exchange Intervention: A Nonlinear Microstructural Analysis. European Economic Review. 52 (1), 55 – 76.
Röthig, A., Semmler, W., Flaschel, P. (2005). Corporate Currency Hedging and Currency Crises. Publications of Darmstadt Technical University, Institute of Economics (VWL) 27194,
Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
Stone, M., Roger, S., Shimizu, S., Nordstrom, A., Kisinbay, T., Restrepo, J. (2009). The Role of the Exchange Rate in Inflation-Targeting Emerging Economies. Washington: IMF Occasional Paper 267 (Washington: International Monetary Fund).
Takagi, S. (1991). Exchange Rate Expectations, A Survey of Survey Studies. IMF Staff Papers,Vol. 38 (1).
Taylor, J. B. (2001). The Role of the Exchange Rate in Monetary-Policy Rules. American Economic Review. 91 (2), 263-267.
Taylor, M. P. (2004). Is Official Exchange Rate Intervention Effective? . Economica, 71. The London School of Economics and Political Science, 1-11.
Taylor, M. P. (2000). Nonlinear Adjustment, Long Run Equilibrium and Exchange Rate Fundamentals . Journal of International Money and Finance, 19, 33-53.
Taylor, M. P. (2005). Official Foreign Exchange Intervention as A Coordinating Signal in the Dollar-Yen Market . Pacific Economic Review, 10 (1), 73–82.
Taylor, M. P. (1995). The Economics of Exchange Rates . Journal of Economic Literature Vigfusson, R. (1996). Switching Between Chartists and Fundamentalists: A Markov Regime- Switching Approach. Working Paper 96-1. Bank of Canada.
Warjiyo, P. 2013. Indonesia: Stabilizing the Exchange rate along Its Fundamental. BIS Paper no. 73. Bank for Internatioanal Settlements.
Westerhoff, F. (2003). Speculative Markets and the Effectiveness of Price Limits. Journal of Economic Dynamics and Control, 28, 493-508.
White, H. (1982). Maximum Likelihood Estimation of Misspecified Models . Econometrica, Vol.50, 1–25.
Wieland, C., & Westerhoff, F. (2005). Exchange Rate Dynamics, Central Bank Interventionand Chaos Control Methods. Journal of Economics Behavior and Organization, 58, 117-132.
Published
2015-01-29
How to Cite
Syarifuddin, F., Achsani, N. A., Hakim, D. B., & Bakhtiar, T. (2015). FOREIGN EXCHANGE EXPECTATIONS IN INDONESIA: REGIME SWITCHING CHARTISTS AND FUNDAMENTALISTS APPROACH. Buletin Ekonomi Moneter Dan Perbankan, 17(2), 197-220. https://doi.org/10.21098/bemp.v17i2.49
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Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
