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On central bank interventions in the Mexican peso/dollar foreign exchange market

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  • Santiago García-Verdú
  • Miguel Zerecero

Abstract

In recent years the Bank of Mexico has made a series of rules-based interventions in the peso/dollar foreign exchange market. We assess the effectiveness of two specific interventions that occurred in periods of great stress for the Mexican economy. The aims of these two interventions were, respectively, to provide liquidity and to promote orderly conditions in the foreign exchange market. For our analysis, we follow the framework implemented by Dominguez (2003) and Dominguez (2006), an event-style microstructure approach. We use the bid-ask spreads as a measure of liquidity and of orderly conditions. In general, our results show no indication of an effect in the opposite direction from the one intended for the first intervention and are fairly conclusive regarding a significant reduction on the bid-ask spread for the second intervention.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 429.

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Length: 40 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:bis:biswps:429

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Keywords: foreign exchange rate; central bank interventions; microstructure;

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  1. Huang, Roger D & Stoll, Hans R, 1997. "The Components of the Bid-Ask Spread: A General Approach," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 10(4), pages 995-1034.
  2. José Julián Sidaoui, 2005. "Central banking intervention under a floating exchange rate regime: ten years of Mexican experience," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 209-30 Bank for International Settlements.
  3. Bazdresch, Santiago & Werner, Alejandro, 2005. "Regime switching models for the Mexican peso," Journal of International Economics, Elsevier, Elsevier, vol. 65(1), pages 185-201, January.
  4. Jorge Iván Canales Kriljenko & Cem Karacadag & Roberto Pereira Guimarães & Shogo Ishii, 2006. "Official Foreign Exchange Intervention," IMF Occasional Papers, International Monetary Fund 249, International Monetary Fund.
  5. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, American Economic Association, vol. 83(5), pages 1356-69, December.
  6. Ramon Moreno, 2011. "Foreign exchange market intervention in EMEs: implications for central banks," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 65-86 Bank for International Settlements.
  7. Buiter, Willem H & Eaton, Jonathan, 1980. "Policy Decentralisation and Exchange Rate Management in Interdependent Economies," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 172, University of Warwick, Department of Economics.
  8. Carmen Broto, 2012. "The effectiveness of forex interventions in four Latin American countries," Banco de Espa�a Working Papers, Banco de Espa�a 1226, Banco de Espa�a.
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