Daily Currency Interventions in Emerging Markets: Incorporating Reserve Accumulation to the Reaction Function
52 Pages Posted: 24 Jul 2017
Date Written: March 30, 2017
This study considers emerging market central bank interventions motivated by international reserve management. Emerging market central banks use currency intervention as a policy tool against exchange rate movements and accumulate international reserves as an insurance against sudden stops or reversals in capital ﬂows. To account for both of these motivations, the model of Ito and Yabu (2007) is extended to include the international reserves-to-GDP ratio at a daily frequency. Daily values of the ratio are forecast using the Mixed Data Sampling (MIDAS) model and exchange rate returns. Compared with the benchmark model, we ﬁnd that the MIDAS model performs better in forecasting the reserve-to-GDP ratio. The extended model is estimated by using the ﬂoating exchange rate regime period data of Turkey. We identify breaks in the Turkish intervention policy, and the reserve-to-GDP variable in the extended model is found to have a signiﬁcant role in the intervention reaction function.
Keywords: currency intervention, international reserves, emerging markets, Turkey, mixed data sampling
JEL Classification: F31, E58, G15, C22, C53
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