Official Interventions in the Foreign Exchange Market: Implications for Exchange Rate and Its Volatility

Hersch Sahay () and M Ramachandran ()
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Hersch Sahay: Pondicherry University

A chapter in Studies in International Economics and Finance, 2022, pp 541-556 from Springer

Abstract: Abstract The official interventions undertaken by monetary authorities in the foreign exchange markets are largely aimed at minimizing the volatility of exchange rates. However, these interventions as documented in literature are more of the type of ‘secret interventions’ which are likely to create ambiguity in the market and trigger volatility. We examine this issue using monthly data from a sample of nine countries for the period 1997:01 to 2019:12. The empirical evidence obtained from GARCH estimates of a dynamic panel model with conditional covariance as proposed by Cermeño and Grier (Contributions to economic analysis. Elsevier, pp. 259–277, 2006) reveals that official intervention is counterproductive, i.e. such interventions seem to trigger the volatility of exchange rates rather than minimizing them.

Keywords: Forex market; Forex volatility; Official intervention; Panel GARCH (search for similar items in EconPapers)
JEL-codes: C33 F31 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/978-981-16-7062-6_27

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