Central bank interventions and exchange rate band regimes

This paper presents an endogenous switching regression model for the exchange rate process where the switch is defined by the central bank criteria functions for intervening. We study the signal effect of interventions on the exchange rate using Norwegian daily data on official interventions. We fir...

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Bibliographic Details
Published in:Journal of international money and finance 2001-10, Vol.20 (5), p.677-700
Main Author: Mundaca, B.Gabriela
Format: Article
Language:English
Subjects:
Banking industry
Central banks
Exchange rate bands
Foreign exchange rates
Heteroskedasticity
Intervention
Mathematical models
Regression analysis
Sterilized interventions
Studies
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Summary:This paper presents an endogenous switching regression model for the exchange rate process where the switch is defined by the central bank criteria functions for intervening. We study the signal effect of interventions on the exchange rate using Norwegian daily data on official interventions. We first find that interventions seemed to have been more effective in moving the exchange rate in the expected (‘desired’) direction in the regime when the exchange rate was kept away from the edges of the band. This type of intervention regime also reduces significantly the conditional volatility of the exchange rate. Thus, when the exchange rate was near the weakest edge of the currency band, its conditional variance was significantly larger than when it was moving around its central parity. Finally, we show that in order to obtain consistent estimates, intervention variables cannot enter as exogenous variables in the conditional mean (or conditional variance) of the exchange rate.
ISSN:0261-5606
1873-0639
DOI:10.1016/S0261-5606(01)00020-1