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The Empirics of Foreign Exchange Intervention in Emerging Market Countries The Cases of Mexico and Turkey

Authors
Disciplines
  • Economics

Abstract

The Empirics of Foreign Exchange Intervention in Emerging Market Countries: nullnullThe Cases of Mexico and Turkeynullnull -- Roberto F. Guimarães and Cem Karacadag -- July 1, 2004 -- IMF Working Paper No. 04/123 WP/04/123 The Empirics of Foreign Exchange Intervention in Emerging Market Countries: The Cases of Mexico and Turkey Roberto F. Guimarães and Cem Karacadag © 2004 International Monetary Fund WP/04/123 IMF Working Paper Monetary and Financial Systems Department The Empirics of Foreign Exchange Intervention in Emerging Market Countries: The Cases of Mexico and Turkey Prepared by Roberto F. Guimarães and Cem Karacadag1 Authorized for distribution by Shogo Ishii July 2004 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper analyzes the effects of intervention on the level and volatility of the exchange rate in Mexico and Turkey, two emerging countries that have floating exchange rate regimes. The paper finds mixed evidence on the effectiveness of intervention. In Mexico, foreign exchange sales have a small impact on the exchange rate level and raise short-term volatility, while in Turkey, intervention does not appear to affect the exchange rate level but reduces its shortterm volatility. In both cases, the findings are consistent with officially stated policy objectives, which aim to minimize the effect of intervention on the exchange rate, but cast doubt on claims that intervention is a useful tool for smoothing volatility. Although these findings cannot be generalized to other emerging markets, intervention’s apparently limited effectiveness highlights the need for central banks to use their scarc

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