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Daily currency interventions in an emerging market : incorporating reserve accumulation to the reaction function

Michael Frömmel (UGent) and Murat Midiliç (UGent)
(2021) ECONOMIC MODELLING. 97. p.461-476
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Organization
Abstract
Understanding the intervention policy of central banks on currency markets is important for both practitioners and researchers. Existing models for central bank interventions exclusively focus on exchange rate targeting in level or volatility. However, central banks in emerging economies use international reserves as an insurance against sudden capital outflows and use interventions to manage them. Omitting the reserve component in the reaction function may therefore lead to a bias and wrong conclusions. We therefore extend the reaction function by incorporating a reserve component and illustrate its benefit by applying it to the case of Turkey. We find that the intervention policy of the Turkish Central Bank indeed incorporated interventions to manage their reserves and is therefore better described by our extended model. Furthermore it provides a more accurate description of changes in the central bank's policy. Our results strongly suggest to incorporate reserve variables in intervention functions for emerging countries.
Keywords
Currency intervention, International reserves, Emerging markets, Turkey, Mixed data sampling

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MLA
Frömmel, Michael, and Murat Midiliç. “Daily Currency Interventions in an Emerging Market : Incorporating Reserve Accumulation to the Reaction Function.” ECONOMIC MODELLING, vol. 97, 2021, pp. 461–76, doi:10.1016/j.econmod.2020.09.020.
APA
Frömmel, M., & Midiliç, M. (2021). Daily currency interventions in an emerging market : incorporating reserve accumulation to the reaction function. ECONOMIC MODELLING, 97, 461–476. https://doi.org/10.1016/j.econmod.2020.09.020
Chicago author-date
Frömmel, Michael, and Murat Midiliç. 2021. “Daily Currency Interventions in an Emerging Market : Incorporating Reserve Accumulation to the Reaction Function.” ECONOMIC MODELLING 97: 461–76. https://doi.org/10.1016/j.econmod.2020.09.020.
Chicago author-date (all authors)
Frömmel, Michael, and Murat Midiliç. 2021. “Daily Currency Interventions in an Emerging Market : Incorporating Reserve Accumulation to the Reaction Function.” ECONOMIC MODELLING 97: 461–476. doi:10.1016/j.econmod.2020.09.020.
Vancouver
1.
Frömmel M, Midiliç M. Daily currency interventions in an emerging market : incorporating reserve accumulation to the reaction function. ECONOMIC MODELLING. 2021;97:461–76.
IEEE
[1]
M. Frömmel and M. Midiliç, “Daily currency interventions in an emerging market : incorporating reserve accumulation to the reaction function,” ECONOMIC MODELLING, vol. 97, pp. 461–476, 2021.
@article{8688320,
  abstract     = {{Understanding the intervention policy of central banks on currency markets is important for both practitioners and researchers. Existing models for central bank interventions exclusively focus on exchange rate targeting in level or volatility. However, central banks in emerging economies use international reserves as an insurance against sudden capital outflows and use interventions to manage them. Omitting the reserve component in the reaction function may therefore lead to a bias and wrong conclusions. We therefore extend the reaction function by incorporating a reserve component and illustrate its benefit by applying it to the case of Turkey. We find that the intervention policy of the Turkish Central Bank indeed incorporated interventions to manage their reserves and is therefore better described by our extended model. Furthermore it provides a more accurate description of changes in the central bank's policy. Our results strongly suggest to incorporate reserve variables in intervention functions for emerging countries.}},
  author       = {{Frömmel, Michael and Midiliç, Murat}},
  issn         = {{0264-9993}},
  journal      = {{ECONOMIC MODELLING}},
  keywords     = {{Currency intervention,International reserves,Emerging markets,Turkey,Mixed data sampling}},
  language     = {{eng}},
  pages        = {{461--476}},
  title        = {{Daily currency interventions in an emerging market : incorporating reserve accumulation to the reaction function}},
  url          = {{http://dx.doi.org/10.1016/j.econmod.2020.09.020}},
  volume       = {{97}},
  year         = {{2021}},
}

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