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Foreign exchange market interventions under inflation targeting: The case of Guatemala

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  • Catalán-Herrera, Juan

Abstract

This paper studies the effectiveness of FX interventions within an inflation targeting context. I estimate the central bank reaction function, using a friction model à la Rosett. Then, I use the conditional expectation of intervention, as an instrument for actual interventions in a reduced form model of exchange rate daily-returns. Results show evidence of threshold effects in the reaction function, and indicate that intervention had a dampening effect over the daily exchange rate return's volatility, but no influence over the level of exchange rate. The central bank reacted systematically to previous-day exchange rate changes and to deviations from short-term trends.

Suggested Citation

  • Catalán-Herrera, Juan, 2016. "Foreign exchange market interventions under inflation targeting: The case of Guatemala," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 42(C), pages 101-114.
    • Handle: RePEc:eee:intfin:v:42:y:2016:i:c:p:101-114
    DOI: 10.1016/j.intfin.2016.02.003
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    More about this item

    Keywords

    Monetary policy; Exchange rates; Intervention; Guatemala;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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