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A Dynamic Model of Central Bank Intervention

Author

Listed:
  • Ana Maria Herrera
  • Pinar Ozbay

Abstract

We examine central bank intervention in foreign exchange markets using a dynamic censored regression model. We allow the amount of purchase and sale interventions to depend nonlinearly upon lagged values of intervention and on measures of disorderly foreign exchange markets. Using data for the CBRT, we find persistence in interventions, which may suggest the presence of political costs and/or a signal of future monetary policy. We find strong evidence of nonnormality and heteroskedasticity in the Tobit model of the reaction function. Results using a robust estimator reveal the importance of considering these specification issues when modeling central bank intervention.

Suggested Citation

  • Ana Maria Herrera & Pinar Ozbay, 2005. "A Dynamic Model of Central Bank Intervention," Working Papers 0501, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:0501
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange rate; intervention; central bank; dynamic Tobit; CLAD;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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