Solving Endogeneity in Assessing the Efficacy of Foreign Exchange Market Interventions
AbstractSterilized foreign exchange market interventions have been suspected of being inefficient by many empirical studies, but they are plagued by endogeneity problems. To solve the problems, this paper identifies a system that depicts interactions between the interventions and the foreign exchange rate. The model shows that the interventions are effective when the interventions alter the market participants' conditional expectations of the rate without decreasing the conditional variances. This paper estimates Markov-switching type policy reaction functions by conditional MLE, and market demand/supply curves by IV estimation with generated regressors. The empirical results verify that the interventions of the Bank of Korea from 2001 to 2002 were indeed effective.
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Bibliographic InfoPaper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2007-004.
Length: 23 pages
Date of creation: Feb 2007
Date of revision:
Sterilized intervention; Endogeneity; Markov-switching policy function;
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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-02-24 (All new papers)
- NEP-CBA-2007-02-24 (Central Banking)
- NEP-IFN-2007-02-24 (International Finance)
- NEP-MAC-2007-02-24 (Macroeconomics)
- NEP-MON-2007-02-24 (Monetary Economics)
- NEP-SEA-2007-02-24 (South East Asia)
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.:
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- Christopher J. Neely, 2005.
"An analysis of recent studies of the effect of foreign exchange intervention,"
Federal Reserve Bank of St. Louis, issue Nov, pages 685-718.
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- Kearns, Jonathan & Rigobon, Roberto, 2005. "Identifying the efficacy of central bank interventions: evidence from Australia and Japan," Journal of International Economics, Elsevier, vol. 66(1), pages 31-48, May.
- Galati, Gabriele & Melick, William & Micu, Marian, 2005. "Foreign exchange market intervention and expectations: The yen/dollar exchange rate," Journal of International Money and Finance, Elsevier, vol. 24(6), pages 982-1011, October.
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