Emre Ozsoz (Fordham University, Department of Economics) Erick W. Rengifo (Fordham University, Department of Economics) Dominick Salvatore (Fordham University, Department of Economics)
Abstract
In dollarized financial systems, there exists a currency mismatch risk that could lead to financial crises. Central Banks in such economies have to adjust their foreign currency policies accordingly. This paper estimates the probability of Central Bankers' intervention in the foreign currency markets in dollarized economies as explained by the volatility measures of the local exchange rate. By employing data from five countries, we show that in controlled inflation environments, not only Central Banks' interventions but also the direction of the interventions can be predicted to a good degree while under high inflation our model fails to provide healthy results.
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Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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