Media bias and central bank response. Evidence from the nominal exchange rate behavior in Colombia
AbstractColombia introduced a market-determined Nominal Exchange Rate (NER) with the US Dollar in 1991, after more than 20 years of controlled and multiple exchange rates. The first nine years the NER was set by an exchange rate band system, since 1999 the exchange rate is determined in a “dirty float” market. The behavior (revaluation / devaluation) of the NER is constantly reported in news, editorials and op-eds of major newspapers of the nation. This paper shows that there is media bias in favor of reporting a revaluation episode in contrast to a devaluation one. At the same time Colombia’s central bank allegedly intervenes in the exchange rate market to reduce volatility. However, it is also shown that the central bank buys US dollars to lessen a revaluation event as a response to the media bias and not volatility. It is also found that the media bias was higher during the exchange rate band system in contrast to the free market period.
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Date of creation: 29 Nov 2011
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