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Do foreign exchange interventions work as coordinating signals in Colombia?

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  • Juan David Durán-Vanegas

Abstract

This paper analyses the effectiveness of official interventions of the Colombian Central Bank in the foreign exchange market over the period of June 2008–December 2013. The estimation procedure suggested by Hansen (2000) is used to estimate a threshold model for the spot exchange rate that splits the data sample into two different regimes that depend on the extent of the misalignment of the exchange rate from a fundamental value. The estimation results provide empirical evidence of the existence of a coordination channel of intervention proposed by Sarno and Taylor (2001). According to the theory of the coordination channel, interventions by central banks work as signals that solve a coordination failure in the foreign exchange market when speculation moves the exchange rate from its fundamental value. The results suggest that foreign exchange interventions had a considerable and statistically significant effect in depreciating the domestic currency when the spot exchange rate was sufficiently below from its fundamental value.

Suggested Citation

  • Juan David Durán-Vanegas, 2015. "Do foreign exchange interventions work as coordinating signals in Colombia?," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 33(78), pages 169-175, December.
  • Handle: RePEc:col:000107:014117
    DOI: 10.1016/j.espe.2015.05.001
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    References listed on IDEAS

    as
    1. Juan J. Echavarría & Luis F. Melo-Velandia & Mauricio Villamizar-Villegas, 2018. "The impact of pre-announced day-to-day interventions on the Colombian exchange rate," Empirical Economics, Springer, vol. 55(3), pages 1319-1336, November.
    2. Anna J. Schwartz, 2000. "The Rise and Fall of Foreign Exchange Market Intervention," NBER Working Papers 7751, National Bureau of Economic Research, Inc.
    3. Mauricio Villamizar-Villegas, 2016. "Identifying The Effects Of Simultaneous Monetary Policy Shocks," Contemporary Economic Policy, Western Economic Association International, vol. 34(2), pages 268-296, April.
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    5. Reitz, Stefan & Taylor, Mark P., 2008. "The coordination channel of foreign exchange intervention: A nonlinear microstructural analysis," European Economic Review, Elsevier, vol. 52(1), pages 55-76, January.
    6. Dominguez, Kathryn M. E., 2003. "The market microstructure of central bank intervention," Journal of International Economics, Elsevier, vol. 59(1), pages 25-45, January.
    7. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
    8. Kilian, Lutz & Taylor, Mark P., 2003. "Why is it so difficult to beat the random walk forecast of exchange rates?," Journal of International Economics, Elsevier, vol. 60(1), pages 85-107, May.
    9. Sarno,Lucio & Taylor,Mark P., 2003. "The Economics of Exchange Rates," Cambridge Books, Cambridge University Press, number 9780521485845.
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    Cited by:

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    2. Sigal Ribon, 2017. "Why the Bank of Israel Intervenes in the Foreign Exchange Market, and What Happens to the Exchange Rate," Bank of Israel Working Papers 2017.04, Bank of Israel.
    3. Oguzhan Ozcelebi & Kaya Tokmakcioglu & Emre Su, 2021. "Revisiting the asymmetric impacts of the exchange market pressure on the inflation, interest rate and foreign trade balance in Eastern Europe," Empirical Economics, Springer, vol. 61(5), pages 2517-2538, November.

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    More about this item

    Keywords

    Foreign exchange intervention; Coordination channel; Threshold models;
    All these keywords.

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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