Optimal Central Bank intervention in the foreign exchange market (Q1306767)

This paper studies the problem of optimally controlling an exchange rate to keep it close to a given target. There are both a running cost for deviations from the target and fixed and proportional costs for each intervention. The controlled process behaves like a geometric Brownian motion between interventions which are of impulse control type. The authors show how to construct an optimal control from a solution of the quasi-variational inequalities for this problem, construct a solution to the quasi-variational inequalities and numerically provide some comparative statics.