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Foreign Exchange Intervention: A Shield Against Appreciation Winds?

  • International Monetary Fund

This paper examines foreign exchange intervention practices and their effectiveness using a new qualitative and quantitative database for a panel of 15 economies covering 2004 - 10, with special focus on Latin America. Qualitatively, it examines institutional aspects such as declared motives, instruments employed, the use of rules versus discretion, and the degree of transparency. Quantitatively, it assesses the effectiveness of sterilized interventions in influencing the exchange rate using a two-stage IV-panel data approach to overcome endogeneity bias. Results suggest that interventions slow the pace of appreciation, but the effects decrease rapidly with the degree of capital account openness. At the same time, interventions are more effective in the context of already ?overvalued'' exchange rates.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/165.

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Length: 29
Date of creation: 01 Jul 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/165
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  1. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
  2. Hernán Rincón & Jorge Toro, 2010. "Are Capital Controls and Central Bank Intervention Effective?," BORRADORES DE ECONOMIA 007622, BANCO DE LA REPÚBLICA.
  3. Jonathan David Ostry & Atish R. Ghosh & Karl Friedrich Habermeier & Luc Laeven & Marcos Chamon & Mahvash Saeed Qureshi & Annamaria Kokenyne, 2011. "Managing Capital Inflows: What Tools to Use?," IMF Staff Discussion Notes 11/06, International Monetary Fund.
  4. Matías Tapia & Andrea Tokman, 2004. "Effects of Foreign Exchange Intervention Under Public Information: the Chilean Case," Working Papers Central Bank of Chile 255, Central Bank of Chile.
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