Central bank interventions and exchange rate band regimes

• 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
• ISSN: 0261-5606; 1873-0639
• DOI: 10.1016/S0261-5606(01)00020-1

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.