When does the Central Bank intervene the foreign exchange market? Estimating a time‐varying threshold intervention function

Foreign exchange interventions as an (implicit) policy instrument to stabilize prices in emerging economies with inflation targeting (IT) have gain attention among scholars and policy makers recently. Yet, it is not fully clear when and under which circumstances these interventions occur. In this article, we shed light on this topic by proposing an empirical methodology to identify the (unobservable) threshold function that defines the timing of interventions by Central Banks. We apply this methodology to Chile, a market‐oriented economy that despite combining an IT scheme and a free‐floating forex regime officially, has experienced occasional interventions.