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Foreign exchange intervention revisited: A new way of estimating censored models

Author

Listed:
  • Daniel Ordoñez‐Callamand
  • Mauricio Villamizar‐Villegas
  • Luis F. Melo‐Velandia

Abstract

In this paper, we investigate a long‐standing issue in the international finance literature: namely, how to capture the behaviour of central banks when deciding foreign exchange policies. Essentially, the main empirical problem is that a researcher observes numerous large‐scale purchases of foreign currency but a general absence of sales. This asymmetry has motivated the use of heavily dependent parametric models. We take a fresh look at this problem by allowing for a more flexible estimation, robust to various model specifications. Our results indicate that our method outperforms some of the standard models used to date. Hence, our main contribution is to provide policymakers with an improved and readily accessible toolkit to evaluate their actions. To shed some light on this, we estimate policy functions for the cases of Turkey and Colombia and highlight marked differences with the related literature.

Suggested Citation

  • Daniel Ordoñez‐Callamand & Mauricio Villamizar‐Villegas & Luis F. Melo‐Velandia, 2018. "Foreign exchange intervention revisited: A new way of estimating censored models," International Finance, Wiley Blackwell, vol. 21(2), pages 195-213, June.
    • Handle: RePEc:bla:intfin:v:21:y:2018:i:2:p:195-213
    DOI: 10.1111/infi.12131
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    Cited by:

    1. Ordoñez-Callamand, Daniel & Hernandez-Leal, Juan D. & Villamizar-Villegas, Mauricio, 2018. "When multiple objectives meet multiple instruments: Identifying simultaneous monetary shocks," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 78-101.
    2. Markus Hertrich, 2022. "Foreign exchange interventions under a minimum exchange rate regime and the Swiss franc," Review of International Economics, Wiley Blackwell, vol. 30(2), pages 450-489, May.
    3. Wenbo Wang & Dieu Thanh Le & Hail Park, 2020. "Is Foreign Exchange Intervention a Panacea in Diversified Circumstances? The Perspectives of Asymmetric Effects," Sustainability, MDPI, vol. 12(7), pages 1-20, April.
    4. Grabowski, Wojciech & Welfe, Aleksander, 2020. "The Tobit cointegrated vector autoregressive model: An application to the currency market," Economic Modelling, Elsevier, vol. 89(C), pages 88-100.

    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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