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The Efficacy of Foreign Exchange Market Intervention in Malawi

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  • Kisukyabo Simwaka
  • Leslie Mkandawire

Abstract

The Malawi kwacha was floated in February 1994. Since then, the Reserve Bank of Malawi (RBM) has periodically intervened in the foreign exchange market. This report analyses the effectiveness of foreign exchange market interventions by RBM. We used a generalized autoregressive conditional heteroscedastic (GARCH; 1,1) model to simultaneously estimate the effect of intervention on the mean and volatility of the kwacha. We also ran an equilibrium exchange rate model and use the equilibrium exchange rate criterion to compare results with those from the GARCH model. Using monthly exchange rates and official intervention data from January 1995 to June 2008, results from the GARCH model indicated that net sales of United States dollars by RBM depreciate, rather than appreciate, the kwacha. Empirically, this implies the RBM “leans against the wind”, i.e., the RBM intervenes to reduce, but not reverse, around-trend exchange rate depreciation. However, results from the GARCH model for the post-2003 period indicated that RBM intervention in the market stabilizes the kwacha. In general, results from both the GARCH model and the real equilibrium exchange rate criterion for the entire study period showed that RBM interventions have been associated with increased exchange rate volatility, except during the post-2003 period. The implication of this finding is that intervention can only have a temporary influence on the exchange rate, as it is difficult to find empirical evidence showing that intervention has a longlasting, quantitatively significant effect.

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Bibliographic Info

Paper provided by African Economic Research Consortium in its series Research Papers with number RP_216.

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Length: 41 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:aer:rpaper:rp_216

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  1. Robert Andrew & John Broadbent, 1994. "Reserve Bank Operations in the Foreign Exchange Market: Effectiveness and Profitability," RBA Research Discussion Papers rdp9406, Reserve Bank of Australia.
  2. Dominguez, Kathryn M., 1998. "Central bank intervention and exchange rate volatility1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 161-190, February.
  3. Jonathan Kearns & Roberto Rigobon, 2002. "Identifying the Efficacy of Central Bank Interventions: The Australian Case," NBER Working Papers 9062, National Bureau of Economic Research, Inc.
  4. Kim, Suk-Joong & Sheen, Jeffrey, 2002. "The determinants of foreign exchange intervention by central banks: evidence from Australia," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 619-649, October.
  5. Hong Liang & Paul Cashin & Hali J. Edison, 2003. "Foreign Exchange Intervention and the Australian Dollar," IMF Working Papers 03/99, International Monetary Fund.
  6. Hali Edison & Paul Cashin & Hong Liang, 2006. "Foreign exchange intervention and the Australian dollar: has it mattered?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(2), pages 155-171.
  7. Kim, Soyoung, 2003. "Monetary policy, foreign exchange intervention, and the exchange rate in a unifying framework," Journal of International Economics, Elsevier, vol. 60(2), pages 355-386, August.
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