Solving Endogeneity in Assessing the Efficacy of Foreign Exchange Market Interventions

Loading...
Thumbnail Image
If you need an accessible version of this item, please email your request to iusw@iu.edu so that they may create one and provide it to you.

Date

2007-02-21

Journal Title

Journal ISSN

Volume Title

Publisher

Center for Applied Economics and Policy Research

Abstract

Sterilized foreign exchange market interventions have been suspected of being inefficient by many empirical studies, but they are plagued by endogeneity problems. To solve the problems, this paper identifies a system that depicts interactions between the interventions and the foreign exchange rate. The model shows that the interventions are effective when the interventions alter the market participants' conditional expectations of the rate without decreasing the conditional variances. This paper estimates Markov-switching type policy reaction functions by conditional MLE, and market demand/supply curves by IV estimation with generated regressors. The empirical results verify that the interventions of the Bank of Korea from 2001 to 2002 were indeed effective.

Description

Keywords

CAEPR, Center for Applied Economics and Policy Research, Sterilized intervention, Endogeneity, Markov-switching policy function

Citation

DOI

Link(s) to data and video for this item

This paper can also be found on SSRN and RePEc.

Relation

Rights

Type

Working Paper