The Empirics of Foreign Exchange Intervention in Emerging Markets: The Cases of Mexico and Turkey

Cem Karacadag and Roberto Guimarães-Filho

No 2004/123, IMF Working Papers from International Monetary Fund

Abstract: This paper analyzes the effects of intervention on the level and volatility of the exchange rate in Mexico and Turkey, two emerging countries that have floating exchange rate regimes. The paper finds mixed evidence on the effectiveness of intervention. In Mexico, foreign exchange sales have a small impact on the exchange rate level and raise short-term volatility, while in Turkey, intervention does not appear to affect the exchange rate level but reduces its shortterm volatility. In both cases, the findings are consistent with officially stated policy objectives, which aim to minimize the effect of intervention on the exchange rate, but cast doubt on claims that intervention is a useful tool for smoothing volatility. Although these findings cannot be generalized to other emerging markets, intervention's apparently limited effectiveness highlights the need for central banks to use their scarce foreign reserves selectively and parsimoniously.

Keywords: WP; central bank; exchange rate volatility; foreign currency; U.S. dollar; Central bank intervention; foreign exchange market; capital flow; volatility equation; order flow; exchange rate misalignment; purchase operation; Exchange rates; Foreign exchange sales; Currency markets; Foreign exchange purchases; Foreign exchange intervention (search for similar items in EconPapers)
Pages: 33
Date: 2004-07-01
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Citations: View citations in EconPapers (29)

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