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Daily currency interventions in an emerging market: Incorporating reserve accumulation to the reaction function

Michael Frömmel () and Murat Midiliç

Economic Modelling, 2021, vol. 97, issue C, 461-476

Abstract: Understanding the intervention policy of central banks on currency markets is important for both practitioners and researchers. Existing models for central bank interventions exclusively focus on exchange rate targeting in level or volatility. However, central banks in emerging economies use international reserves as an insurance against sudden capital outflows and use interventions to manage them. Omitting the reserve component in the reaction function may therefore lead to a bias and wrong conclusions. We therefore extend the reaction function by incorporating a reserve component and illustrate its benefit by applying it to the case of Turkey. We find that the intervention policy of the Turkish Central Bank indeed incorporated interventions to manage their reserves and is therefore better described by our extended model. Furthermore it provides a more accurate description of changes in the central bank's policy. Our results strongly suggest to incorporate reserve variables in intervention functions for emerging countries.

Keywords: Currency intervention; International reserves; Emerging markets; Turkey; Mixed data sampling (search for similar items in EconPapers)
JEL-codes: C22 C53 E58 F31 G15 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.econmod.2020.09.020

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