The bulk of recent literature on foreign exchange interventions has overlooked the potential interdependencies that may exist between these operations and the conduct of monetary policy. This is the case even under inflation targeting and especially in emerging-market economies, because central banks often explicitly reserve the right to intervene to calm disorderly markets and to accumulate foreign reserves, and when the exchange rate is perceived as being out of step with fundamentals. This paper uses a friction model to estimate intervention reaction functions and the associated marginal effects for Brazil and the Czech Republic since the adoption of inflation targeting in these countries in 1999 and 1998, respectively. The main findings are that: (i) in both countries interventions occur predominantly to reduce exchange rate volatility, while in Brazil the central bank also reacts to exchange rate deviations from medium-term trends; (ii) there are strong, asymmetric threshold effects in the reaction functions, and interventions are more likely and of higher magnitudes when they are carried out to depreciate than to appreciate the domestic currency; and (iii) interventions seem to take place independently of contemporaneous monetary policy in Brazil, but not in the Czech Republic, where both policies appear to be interrelated.
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Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Papers with number
RP2008/95.
References listed on IDEAS 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.:
Paul Moser-Boehm, 2005.
"Governance aspects of foreign exchange interventions,"
BIS Papers chapters,
in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 19-39
Bank for International Settlements.
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