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On central bank interventions in the Mexican peso/dollar foreign exchange market

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  • Santiago García-Verdú
  • Miguel Zerecero

Abstract

In recent years the Bank of Mexico has made a series of rules-based interventions in the peso/dollar foreign exchange market. We assess the effectiveness of two specific interventions that occurred in periods of great stress for the Mexican economy. The aims of these two interventions were, respectively, to provide liquidity and to promote orderly conditions in the foreign exchange market. For our analysis, we follow the framework implemented by Dominguez (2003) and Dominguez (2006), an event-style microstructure approach. We use the bid-ask spreads as a measure of liquidity and of orderly conditions. In general, our results show no indication of an effect in the opposite direction from the one intended for the first intervention and are fairly conclusive regarding a significant reduction on the bid-ask spread for the second intervention.

Suggested Citation

  • Santiago García-Verdú & Miguel Zerecero, 2013. "On central bank interventions in the Mexican peso/dollar foreign exchange market," BIS Working Papers 429, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:429
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    References listed on IDEAS

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    1. Bazdresch, Santiago & Werner, Alejandro, 2005. "Regime switching models for the Mexican peso," Journal of International Economics, Elsevier, vol. 65(1), pages 185-201, January.
    2. Jorge I Canales Kriljenko & Cem Karacadag & Roberto Pereira Guimarães & Shogo Ishii, 2006. "Official Foreign Exchange Intervention," IMF Occasional Papers 249, International Monetary Fund.
    3. Gabriele Galati, 2000. "Trading volumes, volatility and spreads in foreign exchange markets: evidence from emerging market countries," BIS Working Papers 93, Bank for International Settlements.
    4. Domac, Ilker & Mendoza, Alfonso, 2004. "Is there room for foreign exchange interventions under an inflation targeting framework ? Evidence from Mexico and Turkey," Policy Research Working Paper Series 3288, The World Bank.
    5. Broto, Carmen, 2013. "The effectiveness of forex interventions in four Latin American countries," Emerging Markets Review, Elsevier, vol. 17(C), pages 224-240.
    6. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-1369, December.
    7. Willem H. Buiter & Jonathan Eaton, 1980. "Policy Decentralization and Exchange Rate Management in Interdependent Economies," NBER Working Papers 0531, National Bureau of Economic Research, Inc.
    8. Ramon Moreno, 2011. "Foreign exchange market intervention in EMEs: implications for central banks," BIS Papers chapters,in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 65-86 Bank for International Settlements.
    9. José Julián Sidaoui, 2005. "Central banking intervention under a floating exchange rate regime: ten years of Mexican experience," BIS Papers chapters,in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 209-30 Bank for International Settlements.
    10. Huang, Roger D & Stoll, Hans R, 1997. "The Components of the Bid-Ask Spread: A General Approach," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 995-1034.
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    Citations

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    Cited by:

    1. Eduardo Levy Yeyati & Jimena Zúñiga, 2015. "Varieties of capital flows: What do we know," Business School Working Papers 2015-01, Universidad Torcuato Di Tella.
    2. Nuttathum Chutasripanich & James Yetman, 2015. "Foreign exchange intervention: strategies and effectiveness," BIS Working Papers 499, Bank for International Settlements.
    3. Tobal Martín & Yslas Renato, 2016. "Two Models of FX Market Interventions: The Cases of Brazil and Mexico," Working Papers 2016-14, Banco de México.

    More about this item

    Keywords

    foreign exchange rate; central bank interventions; microstructure;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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