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Exchange rate volatility and the effectiveness of FX interventions: the case of Chile

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  • Alejandro Jara
  • Marco Piña

Abstract

In this paper, we study the effectiveness of FX interventions in Chile since adopting a fully flexible exchange rate regime in the late 1990s. In particular, we ask whether these interventions have dumped excess exchange rate volatility and reduced its probability of being in a high volatility state. To do so, we rely on a high-frequency GARCH(1,1) volatility model with Markov-Switching regimes (Haas et al., 2004) and evaluate the effectiveness of FX interventions within a Local Projection setting (Jordà, 2005). We show that FX interventions in Chile tend to occur during high exchange rate volatility periods, which correlate with domestic and foreign financial factors. Moreover, we show that the FX intervention that started by the end of 2019–the latest intervention included in our study–effectively reduced the exchange rate volatility and the probability of being at a high volatility state.

Suggested Citation

  • Alejandro Jara & Marco Piña, 2022. "Exchange rate volatility and the effectiveness of FX interventions: the case of Chile," Working Papers Central Bank of Chile 962, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:962
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    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls

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