Is there room for foreign exchange interventions under an inflation targeting framework ? Evidence from Mexico and Turkey

Ilker Domac and Alfonso Mendoza-Velázquez ()

No 3288, Policy Research Working Paper Series from The World Bank

Abstract: The salient characteristics of emerging market economies coupled with the increasing adoption of inflation targeting in these countries has stimulated much debate about the role of the exchange rate in inflation targeting regimes. The authors aim at shedding more light on this issue by investigating whether central bank foreign exchange interventions have had any impact on the volatility of the exchange rate in Mexico and Turkey since the adoption of the floating regime. To this end, their study, using daily data on foreign exchange intervention, employs an Exponential GARCH framework. Empirical results suggest that both the amount and frequency of foreign exchange interventions have decreased the volatility of the exchange rates in these countries. The authors'findings corroborate the notion that if foreign exchange interventions are carried out with finesse and sensibly-that is, not to defend a particular exchange rate-they could play a useful role in containing the adverse effects of temporary exchange rate shocks on inflation and financial stability.

Keywords: Fiscal&Monetary Policy; Economic Theory&Research; Environmental Economics&Policies; Payment Systems&Infrastructure; Markets and Market Access; Economic Stabilization; Macroeconomic Management; Economic Theory&Research; Fiscal&Monetary Policy; Foreign Trade Promotion and Regulation (search for similar items in EconPapers)
Date: 2004-04-01
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (62)

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