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Effective Sterilized Foreign Exchange Intervention? Evidence from a Rule-Based Policy

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  • Guido M. Kuersteiner
  • David C. Phillips
  • Mauricio Villamizar-Villegas

    (Banco de la República de Colombia)

Abstract

We investigate the effectiveness of sterilized foreign exchange interventions by exploiting a discontinuous policy rule used by the Central Bank of Colombia (CBoC). We use a unique data set from CBoC comprised of tick by tick intervention and order book data, daily capital in- and outflow data, and balance sheet information of financial institutions. We apply regression discontinuity methods to identify the surprise component of rule based exchange rate interventions of the CBoC and use this variation to measure how interventions affect exchange rates and capital flows. At horizons of a few days, our empirical findings support sterilized exchange rate intervention effectiveness via a portfolio channel. The exchange rate effects we see are short-lived. At horizons of a month or longer, capital flows originating from foreign investors restore the exchange rate back to its original level. Our findings also show that the effects of sterilized interventions are amplified by capital controls. A methodological contribution of the paper is to extend regression discontinuity designs to a time series environment and to show how these techniques can be used to identify and estimate non-linear impulse response functions.

Suggested Citation

  • Guido M. Kuersteiner & David C. Phillips & Mauricio Villamizar-Villegas, 2016. "Effective Sterilized Foreign Exchange Intervention? Evidence from a Rule-Based Policy," Borradores de Economia 964, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:964
    DOI: 10.32468/be.964
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    More about this item

    Keywords

    Rule-Based Foreign Exchange Interventions; Portfolio Balance; Central Bank Policy; Regression Discontinuity; Non-linear Impulse Response;
    All these keywords.

    JEL classification:

    • 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
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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