Solving Endogeneity in Assessing the Efficacy of Foreign Exchange Market Interventions
Sterilized foreign exchange market interventions have been suspected of being inefficient by many empirical studies, but they are plagued by endogeneity problems. To solve the problems, this paper identifies a system that depicts interactions between the interventions and the foreign exchange rate. The model shows that the interventions are effective when the interventions alter the market participants' conditional expectations of the rate without decreasing the conditional variances. This paper estimates Markov-switching type policy reaction functions by conditional MLE, and market demand/supply curves by IV estimation with generated regressors. The empirical results verify that the interventions of the Bank of Korea from 2001 to 2002 were indeed effective.
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- Dominguez, Kathryn M., 1998. "Central bank intervention and exchange rate volatility1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 161-190, February.
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- Christopher J. Neely, 2005.
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Federal Reserve Bank of St. Louis, issue Nov, pages 685-718.
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- Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
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- Kathryn M. Dominguez, 1993. "Does Central Bank Intervention Increase the Volatility of Foreign Exchange Rates?," NBER Working Papers 4532, National Bureau of Economic Research, Inc. Full references (including those not matched with items on IDEAS)
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