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Public Savings and the Effectiveness of Sterilized Foreign Exchange Intervention

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  • Juan Camilo Medellín-Martínez

Abstract

Although theoretical models exist that support the Effectiveness of Sterilized Foreign Exchange Intervention (FXI), practiced by central banks with the objective of affecting the level and reducing the volatility of the exchange rate, empirical works provide mixed testimony for developed and emerging countries. Using a GARCH model, this paper aims to offer empirical evidence of how periods of public savings enhance the effectiveness of sterilized FXI for Colombia. To do so, it is necessary to estimate a policy shock measure based on the determinants of foreign exchange (FX) purchases made by the Colombian Central Bank over the 2010-2014 period. During this time span, Banco de la República performed an innovative type of foreign exchange purchases known as Pre-Announced Day-to-Day Interventions. A reaction function for this type of intervention has not yet been estimated. Here, this reaction function will be estimated with an ordinary least squares (OLS) model. ****** A pesar de que existen modelos teóricos que dan soporte a la efectividad de las intervenciones cambiarías practicadas por los bancos centrales con el objetivo de afectar la volatilidad o nivel de la tasa de cambio, la literatura empírica otorga resultados mixtos tanto para países desarrollados como en vía de desarrollo. Con la ayuda de un modelo GARCH, este trabajo quiere dar sustento empírico para Colombia sobre como las intervenciones cambiarías pueden realzar su efectividad en períodos de ahorro público. Para lo anterior, es necesario estimar una medida de choque de política a partir de los determinantes de las intervenciones cambiarías realizadas durante el período 2010-2014. A lo largo de este período de tiempo el Banco de la República realizó un novedoso tipo de intervención llamado compras pre anunciadas día a día. Una función de reacción no ha sido aún estimada para dicha intervención. Aquí se utilizará un modelo de mínimos cuadros ordinarios para su cálculo.

Suggested Citation

  • Juan Camilo Medellín-Martínez, 2018. "Public Savings and the Effectiveness of Sterilized Foreign Exchange Intervention," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República - ESPE, vol. 36(85), pages 117-136, November.
  • Handle: RePEc:col:000107:016939
    DOI: 10.32468/Espe.8507
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    More about this item

    Keywords

    Uncovered interest parity; Sterilized foreign exchange intervention; Public savings; Inflation Targeting; Floating exchange rate; Paridad de interés cubierta; Intervención cambiaria esterilizada; Ahorro público; Inflación objetivo; Flotación cambiaria;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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