The Empirics of Foreign Exchange Intervention in Emerging Markets: The Cases of Mexico and Turkey

By Cem Karacadag, Roberto Guimarães-Filho

July 1, 2004

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Cem Karacadag, and Roberto Guimarães-Filho. The Empirics of Foreign Exchange Intervention in Emerging Markets: The Cases of Mexico and Turkey, (USA: International Monetary Fund, 2004) accessed December 24, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper analyzes the effects of intervention on the level and volatility of the exchange rate in Mexico and Turkey, two emerging countries that have floating exchange rate regimes. The paper finds mixed evidence on the effectiveness of intervention. In Mexico, foreign exchange sales have a small impact on the exchange rate level and raise short-term volatility, while in Turkey, intervention does not appear to affect the exchange rate level but reduces its shortterm volatility. In both cases, the findings are consistent with officially stated policy objectives, which aim to minimize the effect of intervention on the exchange rate, but cast doubt on claims that intervention is a useful tool for smoothing volatility. Although these findings cannot be generalized to other emerging markets, intervention's apparently limited effectiveness highlights the need for central banks to use their scarce foreign reserves selectively and parsimoniously.

Subject: Currency markets, Exchange rates, Financial markets, Foreign exchange, Foreign exchange intervention, Foreign exchange purchases, Foreign exchange sales

Keywords: Capital flow, Central bank, Central bank intervention, Currency markets, Exchange rate misalignment, Exchange rate volatility, Exchange rates, Foreign currency, Foreign exchange intervention, Foreign exchange market, Foreign exchange purchases, Foreign exchange sales, Order flow, Purchase operation, U.S. dollar, Volatility equation, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/123
Stock No:

WPIEA1232004
ISBN:

9781451854640
ISSN:

1018-5941

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