On the effectiveness of exchange rate interventions in emerging markets

• Published in: Journal of international money and finance Vol. 64; pp. 239 - 261
• Main Authors: Daude, Christian, Levy Yeyati, Eduardo, Nagengast, Arne J.
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 01.06.2016; Elsevier Science Ltd
• Subjects: Effectiveness studies; Emerging markets; Equilibrium exchange rate; Estimating techniques; Exchange rate; Foreign exchange rates; FX intervention; Market economies; F37; FX intervention; F31; Exchange rate; Equilibrium exchange rate
• ISSN: 0261-5606; 1873-0639
• DOI: 10.1016/j.jimonfin.2016.01.004

•On average foreign exchange interventions are effective in moving the real exchange rate in the desired direction.•We find little evidence of asymmetries in the effect of sales and purchases.•There is some evidence of more effective interventions for large deviations from the equilibrium. We analyze the effectiveness of exchange rate interventions for a panel of 18 emerging market economies during the period 2003–2011. Using an error-correction model approach, we find that on average, intervention is effective in moving the real exchange rate in the desired direction, controlling for deviations from the equilibrium and short-term changes in fundamentals and global financial variables. Our results are robust to different samples and estimation methods. We find little evidence of asymmetries in the effect of sales and purchases, but some evidence of more effective interventions for large deviations from the equilibrium. We also explore differences across countries according to the possible transmission channels and nature of some global shocks.