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Abstract
This paper develops a flexible exchange rate model of the spot and forward markets, in which risk averse asset holders view domestic and foreign securities as imperfect substitutes on a covered basis because of political or default risk; and in which forward market speculators have rational exchange rate expectations but are averse to exchange risk. In this context, the effects of sterilized government intervention in the spot and forward exchange markets are analyzed and compared. The most general finding is that spot and forward intervention have prolonged, although transitory, exchange rate effects unless both arbitrageurs and speculators are risk neutral. [431]
*I wish to acknowledge the referees' comments, but I am responsible for all remaining errors.
*I wish to acknowledge the referees' comments, but I am responsible for all remaining errors.
Notes
*I wish to acknowledge the referees' comments, but I am responsible for all remaining errors.