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Official Interventions in the Foreign Exchange Market: Implications for Exchange Rate and Its Volatility

In: Studies in International Economics and Finance

Author

Listed:
  • Hersch Sahay

    (Pondicherry University)

  • M. Ramachandran

    (Pondicherry University)

Abstract

The official interventions undertaken by monetary authorities in the foreign exchange markets are largely aimed at minimizing the volatility of exchange rates. However, these interventions as documented in literature are more of the type of ‘secret interventions’ which are likely to create ambiguity in the market and trigger volatility. We examine this issue using monthly data from a sample of nine countries for the period 1997:01 to 2019:12. The empirical evidence obtained from GARCH estimates of a dynamic panel model with conditional covariance as proposed by Cermeño and Grier (Contributions to economic analysis. Elsevier, pp. 259–277, 2006) reveals that official intervention is counterproductive, i.e. such interventions seem to trigger the volatility of exchange rates rather than minimizing them.

Suggested Citation

  • Hersch Sahay & M. Ramachandran, 2022. "Official Interventions in the Foreign Exchange Market: Implications for Exchange Rate and Its Volatility," India Studies in Business and Economics, in: Naoyuki Yoshino & Rajendra N. Paramanik & Anoop S. Kumar (ed.), Studies in International Economics and Finance, pages 541-556, Springer.
    • Handle: RePEc:spr:isbchp:978-981-16-7062-6_27
    DOI: 10.1007/978-981-16-7062-6_27
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    Cited by:

    1. M. Ramachandran, 2023. "Official Intervention, Reserve Accumulation and Exchange Rate Volatility," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 21(2), pages 269-287, June.

    More about this item

    Keywords

    Forex market; Forex volatility; Official intervention; Panel GARCH;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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