INTERVENTION AND SIGNALING: INTERACTION BETWEEN CENTRAL BANKS AND FX MARKETS IN AN EMERGING MARKET

Ashima Goyal

The Singapore Economic Review (SER), 2017, vol. 62, issue 01, 193-225

Abstract: The paper analyzes the effectiveness of intervention and of signals on future intervention on the foreign exchange market of an emerging market (EM) facing large capital flows. A model of strategic interaction between speculators and the Central Bank shows the speculative demand curve to be downward sloping under greater uncertainty about fundamentals, which is common in EMs. Tests with Indian data confirm a stable speculative demand curve. The domestic currency appreciates when net dealer demand is positive. Intervention influences exchange rate levels and volatility. Anticipated intervention decreases dealer turnover, so expectations are stabilizing and signals on future intervention effective.

Keywords: FX markets; market microstructure; central bank intervention; signaling; emerging markets (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1142/S0217590816500326

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