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The Empirics of Foreign Exchange Intervention in Emerging Markets: The Cases of Mexico and Turkey

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Author Info
Roberto Pereira Guimarães
Cem Karacadag
Abstract

This paper analyzes the effects of intervention on the level and volatility of the exchange rate in Mexico and Turkey, two emerging countries that have floating exchange rate regimes. The paper finds mixed evidence on the effectiveness of intervention. In Mexico, foreign exchange sales have a small impact on the exchange rate level and raise short-term volatility, while in Turkey, intervention does not appear to affect the exchange rate level but reduces its shortterm volatility. In both cases, the findings are consistent with officially stated policy objectives, which aim to minimize the effect of intervention on the exchange rate, but cast doubt on claims that intervention is a useful tool for smoothing volatility. Although these findings cannot be generalized to other emerging markets, intervention's apparently limited effectiveness highlights the need for central banks to use their scarce foreign reserves selectively and parsimoniously.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/123.

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Length: 32 pages
Date of creation: 29 Jul 2004
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Handle: RePEc:imf:imfwpa:04/123

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Keywords: Intervention ; Mexico ; Turkey ; Emerging markets ; Exchange market developments ; Foreign exchange reserves ; Floating exchange rates ; Capital flows ; Economic models ;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Matías Tapia & Andrea Tokman, 2004. "Effects of Foreign Exchange Intervention Under Public Information: the Chilean Case," Working Papers Central Bank of Chile 255, Central Bank of Chile. [Downloadable!]
  2. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December. [Downloadable!] (restricted)
    Other versions:
  3. Mark P. Taylor, 1991. "Intervention, Interest Rates, and Charts: Three Essays in International Finance," IMF Working Papers 91/106, International Monetary Fund.
  4. Rasmus Fatum, 2000. "On the effectiveness of sterilized foreign exchange intervention," Working Paper Series 10, European Central Bank. [Downloadable!]
  5. Rasmus Fatum & Michael Hutchison, 2003. "Effectiveness of Official Daily Foreign Exchange Market Intervention Operations in Japan," NBER Working Papers 9648, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Ilker Domac & Alfonso Mendoza, 2002. "Is there Room for Forex Interventions under Inflation Targeting Framework? Evidence from Mexico and Turkey," Discussion Papers 0206, Research and Monetary Policy Department, Central Bank of the Republic of Turkey. [Downloadable!]
  7. Martin D. D. Evans & Richard K. Lyons, 2002. "Order Flow and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 170-180, February. [Downloadable!] (restricted)
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  8. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
  10. Baillie, Richard T. & Osterberg, William P., 1997. "Why do central banks intervene?," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 909-919, December. [Downloadable!] (restricted)
  11. Hali J. Edison & Paul Cashin & Hong Liang, 2003. "Foreign Exchange Intervention and the Australian Dollar: Has it Mattered?," IMF Working Papers 03/99, International Monetary Fund. [Downloadable!]
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  12. 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. [Downloadable!] (restricted)
  13. Charles Engel, 1995. "Why is the forward exchange rate forecast biased? A survey of recent evidence," Research Working Paper 95-06, Federal Reserve Bank of Kansas City. [Downloadable!]
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  14. Andrea Bubula & Inci Ötker, 2002. "The Evolution of Exchange Rate Regimes Since 1990: Evidence From De Facto Policies," IMF Working Papers 02/155, International Monetary Fund. [Downloadable!]
  15. Takatoshi Ito, 2002. "Is Foreign Exchange Intervention Effective?: The Japanese experiences in the 1990s," Discussion Paper Series a428, Institute of Economic Research, Hitotsubashi University.
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  16. Yin-Wong Cheung & Menzie D. Chinn, 1999. "Macroeconomic Implications of the Beliefs and Behavior of Foreign Exchange Traders," NBER Working Papers 7417, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," The Regional Economist, Federal Reserve Bank of St. Louis, issue May, pages 1-10. [Downloadable!]
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  18. Jorge Iván Canales Kriljenko, 2003. "Foreign Exchange Intervention in Developing and Transition Economies: Results of a Survey," IMF Working Papers 03/95, International Monetary Fund. [Downloadable!]
  19. Hung, Juann H, 1997. "Intervention strategies and exchange rate volatility: a noise trading perspective," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 779-793, September. [Downloadable!] (restricted)
  20. corrinne ho & robert n mccauley, 2004. "Living with flexible exchange rates:," International Finance 0411003, EconWPA. [Downloadable!]
  21. Edison, H.J., 1993. "The Effectiveness of Central-Bank Intervention: A Survey of the Litterature after 1982," Princeton Studies in International Economics 18, International Economics Section, Departement of Economics Princeton University,.
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  1. Özge Akinci & Olcay Yücel Çulha & Ümit Özlale & Gülbin Şahinbeyoğlu, 2006. "The effectiveness of foreign exchange interventions under a floating exchange rate regime for the Turkish economy: a post-crisis period analysis," Applied Economics, Taylor and Francis Journals, vol. 38(12), pages 1371-1388, July. [Downloadable!] (restricted)
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