Solving Endogeneity in Assessing the Efficacy of Foreign Exchange Market Interventions
Seok Gil Park
Indiana University Bloomington - Department of Economics
June 12, 2008
CAEPR Working Paper No. 2007-004
This paper evaluates the efficacy of the sterilized foreign exchange rate intervention while mitigating the pervasive endogenous bias in the intervention literature. In an attempt to solve the endogeneity problems, this paper utilizes customer trade data to identify the system of equations. By estimating the various model speciffications, including the Markov-switching policy function, the results show that the interventions undertaken by the Bank of Korea were eýective during 2001 and 2002. Speciffically, the volatile market induced the Bank of Korea to intervene, and the interventions decreased the standard deviation of the changes in the Korean won rate from 5.683~5.793 to 5.676.
Number of Pages in PDF File: 29
Keywords: Sterilized intervention, Endogeneity, Markov-switching policy function
JEL Classification: F31, E58, G15working papers series
Date posted: February 22, 2007 ; Last revised: July 31, 2008
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