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

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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.

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  • 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
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    Cited by:

    1. Pietro Bonaldi & Mauricio Villamizar-Villegas, 2018. "An Auction-Based Test of Private Information in an Interdealer FX Market," Working papers 1, Red Investigadores de Economía.
    2. Lukas Boer, 2019. "Measuring the Effect of Foreign Exchange Intervention Policies on Exchange Rates," DIW Roundup: Politik im Fokus 128, DIW Berlin, German Institute for Economic Research.
    3. 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.
    4. Laura Andrade-Pardo & Oscar Valencia-Arana & Diego Vásquez-Escobar & Mauricio Villamizar-Villegas, 2016. "Uncovering the portfolio balance channel with the use of sovereign credit ratings," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 34(81), pages 191-205, December.
    5. Hernando Vargas-Herrera & Mauricio Villamizar-Villegas, 2019. "Effectiveness of FX Intervention and the Flimsiness of Exchange rate Expectations," Borradores de Economia 1070, Banco de la Republica de Colombia.
    6. Mauricio Villamizar-Villegas & David Perez-Reyna, 2015. "A Survey on the Effects of Sterilized Foreign Exchange Intervention," BORRADORES DE ECONOMIA 012424, BANCO DE LA REPÚBLICA.
    7. Itamar Caspi & Amit Friedman & Sigal Ribon, 2018. "The Immediate Impact and Persistent Effect of FX Purchases on the Exchange Rate," Bank of Israel Working Papers 2018.04, Bank of Israel.
    8. Zeqin Liu & Zongwu Cai & Ying Fang & Ming Lin, 2019. "Statistical Analysis and Evaluation of Macroeconomic Policies: A Selective Review," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201904, University of Kansas, Department of Economics, revised Mar 2019.
    9. Ashesh Rambachan & Neil Shephard, 2019. "A Nonparametric Dynamic Causal Model for Macroeconometrics," Papers 1903.01637, arXiv.org.
    10. David Perez-Reyna & Mauricio Villamizar-Villegas, 2018. "Breaking the trilemma: the effects of financial regulations on foreign assets," BIS Working Papers 718, Bank for International Settlements.
    11. Zongwu Cai & Ying Fang & Ming Lin & Shengfang Tang, 2019. "Testing Unconfoundedness Assumption Using Auxiliary Variables," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201905, University of Kansas, Department of Economics, revised Mar 2019.

    More about this item

    Keywords

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

    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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