Official intervention in Foreign Exchange Market in Malawi: A comparison of GARCH and Equilibrium Exchange Rate approaches

Kisu Simwaka and Leslie Mkandawire

MPRA Paper from University Library of Munich, Germany

Abstract: The Malawi kwacha was floated in February 1994. Since then, the Reserve Bank of Malawi (RBM) has periodically intervened in the foreign exchange market. This report analyses the effectiveness of foreign exchange market interventions by RBM. We used a generalized autoregressive conditional heteroskedastic (GARCH; 1, 1) model to simultaneously estimate the effect of intervention on the mean and volatility of the kwacha. We also ran an equilibrium exchange rate model and use the equilibrium exchange rate criterion to compare results with those from the GARCH model. Using monthly exchange rates and official intervention data from January 1995 to June 2008, results from the GARCH model indicated that net sales of United States dollars by RBM depreciate, rather than appreciate, the kwacha. Empirically, this implies the RBM “leans against the wind”, i.e., the RBM intervenes to reduce, but not reverse, around-trend exchange rate depreciation. However, results from the GARCH model for the post-2003 period indicated that RBM intervention in the market stabilizes the kwacha. In general, results from both the GARCH model and the real equilibrium exchange rate criterion for the entire study period showed that RBM interventions have been associated with increased exchange rate volatility, except during the post-2003 period. The implication of this finding is that intervention can only have a temporary influence on the exchange rate, as it is difficult to find empirical evidence showing that intervention has a long-lasting, quantitatively significant effect.

Keywords: foreign exchange market; official intervention; GARCH; equilibrium exchange rate (search for similar items in EconPapers)
JEL-codes: E50 E51 E52 E58 (search for similar items in EconPapers)
Date: 2010-04-15
New Economics Papers: this item is included in nep-afr, nep-ifn and nep-mon
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