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What Prompts Central Bank Intervention in the Barbadian Foreign Exchange Market?

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  • Jackman, Mahalia

Abstract

The Central Bank of Barbados often intervenes – buys or sells from the foreign exchange (FX) reserves – to ensure the daily clearing of the FX market. This paper estimates an FX intervention function for Barbados using a dynamic complementary log-log model. Three general findings emerged: (i) dynamics play an important role in the Central Bank’s intervention function, meaning that the probability that an intervention takes place today is conditional upon an intervention taking place at least one day prior. This most likely reflects the fact that deficits/surpluses on the FX market tend to be persistent, resulting in intervention over a consecutive number of days; (ii) there appears to be some differences in the response of Central Bank interventions to the other key variables. Particularly, seasonal fluctuations in tourism and interest rate spreads are likely to impact the probability of a sale intervention, but don’t seem to affect the likelihood of a purchase intervention. Moreover, an influx of real estate flows is likely to increase the probability that a purchase intervention takes place, but might have limited impact on the marginal propensity of a sale intervention. Finally, (iii) ‘oil price shocks’ is the only exogenous variable which appears to impact both sale and purchase interventions.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41703.

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Date of creation: Mar 2012
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Publication status: Published in Central Bank of Barbados Economic Review XXXIX.1(2012): pp. 37-52
Handle: RePEc:pra:mprapa:41703

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Keywords: Foreign exchange; intervention; fixed exchange rate;

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  1. Takatoshi Ito & Tomoyoshi Yabu, 2004. "What Prompts Japan to Intervene in the Forex Market? A New Approach to a Reaction Function," NBER Working Papers 10456, National Bureau of Economic Research, Inc.
  2. Almekinders, G.J. & Eijffinger, S.C.W., 1994. "Daily Bundesbank and federal reserve interventions: Are they a reaction to changes in the level and volatility of the DM/$-rate?," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152910, Tilburg University.
  3. DeLisle Worrell & Roland Craigwell & Travis Mitchell, 2008. "The behaviour of a small foreign exchange market with a long-term peg-Barbados," Applied Financial Economics, Taylor & Francis Journals, vol. 18(8), pages 673-682.
  4. Mahalia Jackman & Roland Craigwell & Michelle Doyle-Lowe, 2013. "Nonlinearity in the reaction of the foreign exchange market to interest rate differentials: evidence from a small open economy with a long-term peg," Applied Financial Economics, Taylor & Francis Journals, vol. 23(4), pages 287-296, February.
  5. Moore, Alvon, 2011. "Demand elasticity of oil in Barbados," Energy Policy, Elsevier, vol. 39(6), pages 3515-3519, June.
  6. Mahalia Jackman, 2012. "Foreign exchange intervention in a small open economy with a long term peg," Economics Bulletin, AccessEcon, vol. 32(3), pages 2207-2219.
  7. Kim, Suk-Joong & Sheen, Jeffrey, 2002. "The determinants of foreign exchange intervention by central banks: evidence from Australia," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 619-649, October.
  8. 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.
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