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

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  • Juan José Echavarría
  • Luis Fernando Melo
  • Santiago Téllez
  • Mauricio Villamizar

Abstract

The adoption of a managed regime assumes that interventions are relatively successful. However, while some authors consider that foreign exchange interventions are not effective, arguing that domestic and foreign assets are close substitutes, others advocate their use and maintain that their effects can even last for months. There is also a lack of consensus on the related question of how to intervene. Are dirty interventions more powerful than pre-announced constant ones? This paper compares the effects of day-to-day interventions with discretionary interventions by combining a Tobit-GARCH reaction function with an asymmetric power PGARCH(1,1) impact function. Our results show that the impact of pre-announced and transparent US$ 20 million daily interventions, adopted by Colombia in 2008-2012, has been much larger than the impact of dirty interventions adopted in 2004-2007.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 Col $2, implying that actual interventions of US$ 1000 million increase the exchange rate in one day by 5.50%. We also find a positive impact of capital controls.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 428.

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Length: 31 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:bis:biswps:428

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Keywords: Central bank intervention; reaction function; Tobit-GARCH; foreign exchange intervention mechanisms; capital controls; dirty interventions;

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References

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Cited by:
  1. Augusto de la Torre & Eduardo Levy Yeyati & Samuel Pienknagura, . "Latin America’s Deceleration and the Exchange Rate Buffer : LAC Semiannual Report, October 2013," World Bank Other Operational Studies 16107, The World Bank.

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