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Intervention And Signaling: Interaction Between Central Banks And Fx Markets In An Emerging Market

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  • ASHIMA GOYAL

    (Indira Gandhi Institute of Development Research, Gen. Vaidya Marg, Santosh Nagar, Goregaon (E), Mumbai-400 065, India)

Abstract

The paper analyzes the effectiveness of intervention and of signals on future intervention on the foreign exchange market of an emerging market (EM) facing large capital flows. A model of strategic interaction between speculators and the Central Bank shows the speculative demand curve to be downward sloping under greater uncertainty about fundamentals, which is common in EMs. Tests with Indian data confirm a stable speculative demand curve. The domestic currency appreciates when net dealer demand is positive. Intervention influences exchange rate levels and volatility. Anticipated intervention decreases dealer turnover, so expectations are stabilizing and signals on future intervention effective.

Suggested Citation

  • Ashima Goyal, 2017. "Intervention And Signaling: Interaction Between Central Banks And Fx Markets In An Emerging Market," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 62(01), pages 193-225, March.
    • Handle: RePEc:wsi:serxxx:v:62:y:2017:i:01:n:s0217590816500326
    DOI: 10.1142/S0217590816500326
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    References listed on IDEAS

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    Cited by:

    1. Ashima Goyal, 2018. "Evaluating India’s exchange rate regime under global shocks," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 11(3), pages 304-321, September.

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