A Test for the Presence of Central Bank Intervention in the Foreign Exchange Market with an Application to the Bank of Canada

25 Pages Posted: 7 Nov 2009

See all articles by Douglas J. Hodgson

Douglas J. Hodgson

University of Quebec at Montreal (UQAM) - Department of Economics

Date Written: April 1, 2009

Abstract

We propose a general non-linear simultaneous equations framework for the econometric analysis of models of intervention in foreign exchange markets by central banks in response to deviations of exchange rates from target levels. We consider the instrumental variables estimation of possibly non-linear response functions and tests of intervention when the functional form may be non-linear, asymmetric, and may contain unknown shape parameters. The methodology applies techniques developed for testing in the presence of nuisance parameters unidentified under a null hypothesis to a nonlinear simultaneous equations model. We report the results of an empirical analysis of activity of the Bank of Canada, for the period from 1953-2006, with regard to the Canada-U.S. exchange rate, with changes in foreign reserves proxying for intervention activity.

Keywords: simultaneous equations, foreign exchange reserves, policy reaction functions

Suggested Citation

Hodgson, Douglas J., A Test for the Presence of Central Bank Intervention in the Foreign Exchange Market with an Application to the Bank of Canada (April 1, 2009). CIRANO - Scientific Publications 2009s-14. Available at SSRN: https://ssrn.com/abstract=1501284 or http://dx.doi.org/10.2139/ssrn.1501284

Douglas J. Hodgson (Contact Author)

University of Quebec at Montreal (UQAM) - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada

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