2006 Fiscal Year Final Research Report Summary
Theoretical and Empirical Analysis of The Foreign Exchange Rate Fluctuations
| Project/Area Number |
15203008
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| Research Category |
Grant-in-Aid for Scientific Research (A)
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| Allocation Type | Single-year Grants |
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| Section | 一般 |
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| Research Field |
Economic theory
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| Research Institution | The University of Tokyo |
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Principal Investigator |
ITO Takatoshi The University of Tokyo, Graduate School of Economics, Professor (30203144)
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| Project Period (FY) |
2003 – 2006
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| Keywords | Foreign Exchange Intervention / Exchange Rate / The yen-dollar exchange rate / Microstructure / Reaction Function / Contagion of crises / Currency Crises |
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| Research Abstract |
First, the very short-run exchange rate fluctuations were investigated, theoretically and empirically, with market microstructure approach. The academic conventional wisdom is that the exchange rate is unpredictable and follows a random walk process. However, private financial institutions spent millions of dollars in an effort to predict the exchange rate. The obvious puzzle is solved as new information to the market has to be digested within several hours, during the period financial institutions with better interpretation of new information can predict the direction of the movements. The research shows that such activities are feasible, and also volatility persists for some time.
Second, the currency crisis contagion to another country without obvious macroeconomic weakness is analyzed for possible linkage of the countries. It was shown that trade linkage is important in the strength of contagion from one country to another.
Third, foreign exchange interventions were believed to be ineffective if interventions were sterilized. However, the research shows that interventions are effective under a certain set of conditions, even when they are sterilized. Moreover, it was shown that the monetary authorities tend to intervene when the rate is away from the long-run equilibrium and moving away from the longrun equilibrium quickly.
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