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The Impact of Different Types of Foreign Exchange Intervention: An Event Study Approach

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  • Juan José Echavarría

    ()

  • Luis Fernando Melo Velandia

    ()

  • Mauricio Villamizar

    ()

Abstract

To date, there is still great controversy as to which exchange rate model should be used or which monetary channel should be considered, when measuring the effects of monetary policy. Since most of the literature relies on structural models to address identification problems, the validity of results largely turn on how accurate the assumptions are in describing the full extent of the economy. In this paper we compare the effect of different types of central bank interventions using an event study approach for the Colombian case during the period 2000-2012, without imposing restrictive parametric assumptions or without the need to adopt a structural model. We find that all types of interventions (international reserve accumulation options, volatility options and discretionary) have been successful according to the smoothing criterion. In particular, volatility options seemed to have the strongest effect. We find that results are robust when using different windows sizes and counterfactuals.

Suggested Citation

  • Juan José Echavarría & Luis Fernando Melo Velandia & Mauricio Villamizar, 2013. "The Impact of Different Types of Foreign Exchange Intervention: An Event Study Approach," Borradores de Economia 784, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:784
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    References listed on IDEAS

    as
    1. Juan José Echavarría & Luis Fernando Melo Velandia & Santiago Téllez & Mauricio Villamizar, 2013. "The Impact of Pre-announced Day-to-day Interventions on the Colombian Exchange Rate," BORRADORES DE ECONOMIA 010767, BANCO DE LA REPÚBLICA.
    2. Fatum, Rasmus & Hutchison, Michael M., 2010. "Evaluating foreign exchange market intervention: Self-selection, counterfactuals and average treatment effects," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 570-584, April.
    3. Kenneth N. Kuttner & Adam S. Posen, 2010. "Do Markets Care Who Chairs the Central Bank?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(2-3), pages 347-371, March.
    4. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
    5. Oya Celasun & R. Gaston Gelos & Alessandro Prati, 2004. "Obstacles to disinflation: what is the role of fiscal expectations?," Economic Policy, CEPR;CES;MSH, vol. 19(40), pages 441-481, October.
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    Citations

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    Cited by:

    1. Zhang, Zhichao & Li, He & Zhang, Chuanjie, 2017. "Oral intervention in China: Efficacy of Chinese exchange rate communications," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 24-34.
    2. Hernando Vargas & Andrés González & Diego Rodríguez, 2013. "Foreign exchange intervention in Colombia," BIS Papers chapters,in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 73, pages 95-125 Bank for International Settlements.
    3. Juan David Durán-Vanegas, 2015. "Do foreign exchange interventions work as coordinating signals in Colombia?," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 33(78), pages 169-175, December.

    More about this item

    Keywords

    Central bank intervention; foreign exchange intervention mechanisms; event study. Classification JEL: E52; E58; F31.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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