The efficacy of foreign exchange market intervention in Malawi
The Malawi Kwacha was floated in February 1994. Since then, the Reserve Bank of Malawi has periodically intervened in the foreign exchange market. This paper analyses the effectiveness of foreign exchange market interventions carried out by the Reserve Bank of Malawi. We use a GARCH (1, 1) model to simultaneously estimate the effect of intervention on the mean and volatility of the Malawi kwacha. Using monthly exchange rates and official intervention data from January 2002 to February 2006, the empirical results suggest that intervention activities of the Reserve Bank of Malawi affect the kwacha. In line with similar findings elsewhere in the literature, the paper finds that net sales of dollars by the Reserve Bank of Malawi depreciate, rather than appreciate, the kwacha. This effect is very small, however. Moreover, the paper also finds that the Reserve Bank of Malawi intervention reduces the volatility of the kwacha. This shows that the Reserve Bank actually achieves its objective of smoothing out fluctuations of the kwacha. This can be evidenced by the stability of the kwacha during a greater part of 2004. Thus intervention is, to some extent, used as an effective tool for moderating fluctuations of the kwacha. However, its effectiveness is constrained by the amounts of foreign exchange reserves, which are usually low.
|Date of creation:||01 Jun 2008|
|Publication status:||Published in African Journal of Economic Policy ISSN 1166-4875.AJEP, (2008): pp. 1-38|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Hali Edison & Paul Cashin & Hong Liang, 2006.
"Foreign exchange intervention and the Australian dollar: has it mattered?,"
International Journal of Finance & Economics,
John Wiley & Sons, Ltd., vol. 11(2), pages 155-171.
- Hong Liang & Paul Cashin & Hali J Edison, 2003. "Foreign Exchange Intervention and the Australian Dollar; Has it Mattered?," IMF Working Papers 03/99, International Monetary Fund.
- Humpage, Owen F, 1999. "U.S. Intervention: Assessing the Probability of Success," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 731-747, November.
- Owen F. Humpage, 1996. "U.S. intervention: assessing the probability of success," Working Paper 9608, Federal Reserve Bank of Cleveland.
- Rogers, J. M. & Siklos, P. L., 2003. "Foreign exchange market intervention in two small open economies: the Canadian and Australian experience," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 393-416, June.
- Jeff M. Rogers & Pierre Siklos, 2001. "Foreign Exchange Market Intervention in Two Small Open Economies: The Canadian and Australian Experience," Research Paper Series 57, Quantitative Finance Research Centre, University of Technology, Sydney.
- Beine, Michel & Benassy-Quere, Agnes & Lecourt, Christelle, 2002. "Central bank intervention and foreign exchange rates: new evidence from FIGARCH estimations," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 115-144, February.
- Michel Beine & Agnes Bénassy-Quéré & Christelle Lecourt, 2002. "Central Bank intervention and foreign exchange rates: new evidence from FIGARCH estimations," ULB Institutional Repository 2013/10445, ULB -- Universite Libre de Bruxelles.
- Owen F. Humpage, 1988. "Comment--Intervention and the dollar's decline," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 32-34.
- Robert Andrew & John Broadbent, 1994. "Reserve Bank Operations in the Foreign Exchange Market: Effectiveness and Profitability," RBA Research Discussion Papers rdp9406, Reserve Bank of Australia.
- Kim, Suk-Joong & Sheen, Jeffrey, 2002. "The determinants of foreign exchange intervention by central banks: evidence from Australia," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 619-649, October.
- Reeves, Silke Fabian, 1997. "Exchange rate management when sterilized interventions represent signals of monetary policy," International Review of Economics & Finance, Elsevier, vol. 6(4), pages 339-360.
- Dominguez, Kathryn M. & Frankel, Jeffrey A., 1992. "Does Foreign Exchange Intervention Matter? Disentangling the Portfolio and Expectations Effects," Center for International and Development Economics Research (CIDER) Working Papers 233167, University of California-Berkeley, Department of Economics.
- Kathryn M. Dominguez and Jeffrey A. Frankel., 1992. "Does Foreign Exchange Intervention Matter? Disentangling the Portfolio and Expectations Effects," Center for International and Development Economics Research (CIDER) Working Papers C92-001, University of California at Berkeley.
- Ronald MacDonald & Luca Ricci, 2001. "PPP and the Balassa Samuelson Effect: the Role of the Distribution Sector," CESifo Working Paper Series 442, CESifo Group Munich.
- R. Macdonald & L. Ricci, 2003. "PPP and the Balassa Samuelson Effect: The Role of the DistributionSector," DNB Staff Reports (discontinued) 81, Netherlands Central Bank.
- Ronald MacDonald & Luca A Ricci, 2001. "PPP and the Balassa Samuelson Effect; The Role of the Distribution Sector," IMF Working Papers 01/38, International Monetary Fund.
- Edison, H.J., 1993. "The Effectiveness of Central-Bank Intervention: A Survey of the Litterature after 1982," Princeton Studies in International Economics 18, International Economics Section, Departement of Economics Princeton University,.
- Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
- Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, Enero-Jun.
- Leahy, Michael P, 1995. "The profitability of US intervention in the foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 14(6), pages 823-844, December.
- Kim, Soyoung, 2003. "Monetary policy, foreign exchange intervention, and the exchange rate in a unifying framework," Journal of International Economics, Elsevier, vol. 60(2), pages 355-386, August.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
- Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Milton Friedman & Anna J. Schwartz, 1982. "Monetary Trends in the United States and United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975," NBER Books, National Bureau of Economic Research, Inc, number frie82-2, Enero-Jun.
- Schwartz, Anna J, 1996. "US Foreign Exchange Market Intervention since 1962," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(4), pages 379-397, September.
- Bonser-Neal, Catherine & Tanner, Glenn, 1996. "Central bank intervention and the volatility of foreign exchange rates: evidence from the options market," Journal of International Money and Finance, Elsevier, vol. 15(6), pages 853-878, December.
- Hung, Juann H, 1997. "Intervention strategies and exchange rate volatility: a noise trading perspective," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 779-793, September.
- Kim, Suk-Joong & Kortian, Tro & Sheen, Jeffrey, 2000. "Central bank intervention and exchange rate volatility -- Australian evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 381-405, December.
- Jonathan Kearns & Roberto Rigobon, 2002. "Identifying the Efficacy of Central Bank Interventions: The Australian Case," NBER Working Papers 9062, National Bureau of Economic Research, Inc.
- 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.
- Owen F. Humpage, 1988. "Intervention and the dollar's decline," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-16.
- Loopesko, Bonnie E., 1984. "Relationships among exchange rates, intervention, and interest rates: An empirical investigation," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 257-277, December.
- Baillie, Richard T. & P. Osterberg, William, 1997. "Central bank intervention and risk in the forward market," Journal of International Economics, Elsevier, vol. 43(3-4), pages 483-497, November.
- Lewis, Karen K, 1995. "Are Foreign Exchange Intervention and Monetary Policy Related, and Does It Really Matter?," The Journal of Business, University of Chicago Press, vol. 68(2), pages 185-214, April.
- Johan Mathisen, 2003. "Estimation of the Equilibrium Real Exchange Rate for Malawi," IMF Working Papers 03/104, International Monetary Fund.
- Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:15946. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.