Unveiling the Effects of Foreign Exchange Intervention: A Panel Approach

Abstract

We study the effect of foreign exchange intervention on the exchange rate relying on an instrumental-variables panel approach. We find robust evidence that intervention affects the level of the exchange rate in an economically meaningful way. A purchase of foreign currency of 1 percentage point of GDP causes a depreciation of the nominal and real exchange rates in the ranges of [1.7-2.0] percent and [1.4-1.7] percent respectively. The effects are found to be quite persistent. The paper also explores possible asymmetric effects, and whether effectiveness depends on the depth of domestic financial markets.

Keywords: Foreign exchange intervention, Exchange rates, Nominal effective exchange rate, Exchange rate depreciation, Panel analysis, reserves, central bank, exchange rate movements, instruments, currency, portfolio, central banks, interest, interest rate, domestic currency

JEL Classification: E58, F31