IS FOREIGN EXCHANGE CENTRAL BANK INTERVENTION EFFECTIVE IN EMERGING MARKETS: EVIDENCE FROM MEXICO AND TURKEY

Alfonso MENDOZA (University of York)

The aim of this paper is to examine the effects of Central Bank intervention on the volatility of the foreign exchange market. By means of an Exponential GARCH framework we study the flexible exchange rate regimes pursued after the devaluation of the Peso in Mexico and the Lira in Turkey. Among others we find significant evidence suggesting that both the amount and frequency of intervention operations have decreased the volatility of the exchange rates. The signals sent to the market by the Banco de México have positively affected the conditional variance, whereas in Turkey signals are not statistically significant. The individual effects of purchases and sales of dollars are also investigated. Finally, departures from normality are accounted for using the Laplace density function as conditional distribution.