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The Empirics of Foreign Exchange Intervention in Emerging Markets

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  • Cem Karacadag
  • Roberto Pereira Guimarães
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    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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    Bibliographic Info

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

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    Length: 33
    Date of creation: 01 Jul 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/123

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    Related research

    Keywords: Emerging markets; Exchange market developments; Foreign exchange reserves; Floating exchange rates; Capital flows; Economic models; foreign exchange; exchange rate; exchange rate volatility; foreign exchange market; foreign exchange sales; exchange sales; inflation; exchange rates; monetary policy; foreign currency; exchange rate level; exchange rate changes; exchange rate movements; exchange rate regime; exchange rate regimes; foreign exchange purchases; exchange purchases; exchange rate expectations; inflation targeting; floating exchange rate; exchange rate policy; exchange rate depreciations; rational expectations; currency substitution; exchange rate levels; flexible exchange rate; flexible exchange rate regimes; exchange rate misalignment; spot exchange rate; inflation targeting framework; floating exchange rate regime; flexible exchange rates; money supply; foreign exchange transactions; inflation target; fixed exchange rate regime; inflationary expectations; exchange rate dynamics; floating exchange rate regimes; forward exchange rate; exchange risk; foreign exchange markets; exchange rate appreciations; exchange transactions; current exchange rate; bilateral exchange rate; currency risks; exchange rate fluctuations; exchange markets; exchange rate stability; exchange market intervention; forward exchange; dollar exchange rate; fixed exchange rate; exchange rate risk; exchange rate flexibility; log exchange rate; monetary base; exchange rate data; exchange rate change; bilateral exchange rates; exchange rate index; currency depreciation;

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    Cited by:
    1. Ozge Akinci & Olcay Yucel Culha & Umit Ozlale & Gulbin Sahinbeyoğlu, 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 & Francis Journals, Taylor & Francis Journals, vol. 38(12), pages 1371-1388.

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