Daily Currency Interventions in Emerging Markets: Incorporating Reserve Accumulation to the Reaction Function

52 Pages Posted: 24 Jul 2017

See all articles by Michael Frömmel

Michael Frömmel

Ghent University - Department of Financial Economics

Murat Midiliç

Ghent University-Universiteit Gent - Department of Financial Economics

Date Written: March 30, 2017

Abstract

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

Suggested Citation

Frömmel, Michael and Midiliç, Murat, Daily Currency Interventions in Emerging Markets: Incorporating Reserve Accumulation to the Reaction Function (March 30, 2017). Available at SSRN: https://ssrn.com/abstract=3005956 or http://dx.doi.org/10.2139/ssrn.3005956

Michael Frömmel

Ghent University - Department of Financial Economics ( email )

Sint-Pietersplein 5
Ghent, 9000
Belgium

Murat Midiliç (Contact Author)

Ghent University-Universiteit Gent - Department of Financial Economics ( email )

Ghent, 9000
Belgium

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