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The impact of pre-announced day-to-day interventions on the Colombian exchange rate

Author

Listed:
  • Juan J. Echavarría

    (Banco de la República de Colombia)

  • Luis F. Melo-Velandia

    (Banco de la República de Colombia)

  • Mauricio Villamizar-Villegas

    (Banco de la República de Colombia)

Abstract

There is a general lack of consensus within the literature on the question of how to intervene in the foreign exchange market. Are secret (dirty) interventions more powerful than pre-announced interventions? This paper compares the effects of pre-announced day-to-day intervention with respect to discretionary intervention, by combining a Tobit-GARCH policy function with an asymmetric power PGARCH impact function. Using Colombia as a case study, we show that the impact of pre-announced daily interventions, adopted in 2008, is larger than the impact of dirty interventions adopted during 2004–2007. In terms of the former, we find that the impact of a change in daily interventions (from US$ 20 million to US$ 40 million) raises the exchange rate by approximately COP $2, implying that actual interventions of US$ 1000 million depreciate domestic currency by 5.5%. Additionally, we find that capital controls had a positive effect on the exchange rate.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:empeco:v:55:y:2018:i:3:d:10.1007_s00181-017-1299-1
    DOI: 10.1007/s00181-017-1299-1
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    Keywords

    Central bank intervention; Reaction function; Tobit-GARCH; Foreign exchange intervention; Capital controls;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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