Conscientia Beam || conscientiabeam.com

Export to

Citations

Contact Us

For Marketing, Sales and Subscriptions Inquiries

2637 E Atlantic Blvd #43110
Pompano Beach, FL 33062

USA

Conference List

The Economics and Finance Letters

June 2019, Volume 6, 2, pp 203-209

Exchange Rate Volatility, Foreign Exchange Market Intervention and Asymmetric Preferences

Helena Glebocki Keefe

Hedieh Shadmani

Helena Glebocki Keefe¹ Hedieh Shadmani¹ ^,
;

Department of Economics, Fairfield University, USA. ¹

on Google Scholar

on PubMed

Pages: 203-209

DOI: 10.18488/journal.29.2019.62.203.209

Article History:

Received: 08 August, 2019
Revised: 12 September, 2019
Accepted: 15 October, 2019
Published: 04 December, 2019

View Citation

284Views

Create Citation Alert

Abstract:

Policymakers in emerging market economies intervene in currency markets to counter appreciation or depreciation pressure, while also responding to the degree of exchange rate volatility. This paper investigates whether the asymmetric response in terms of foreign exchange intervention depends on the degree of exchange rate volatility. Specifically, we estimate whether the response by policymakers to currency market conditions differs in above or below threshold levels of volatility. We use dynamic threshold panel analysis presented within an asymmetric policy reaction function to investigate the role of exchange rate volatility in foreign exchange intervention. We estimate the model using Generalized Method of Moments (GMM) with monthly data for 23 emerging market economies from 2000 to 2016. We find that the asymmetric aversion to appreciation only holds under below-threshold volatility scenarios, and that the majority of the time, policymakers are simply leaning against exchange rate movements to ensure stable exchange rate conditions. The results confirm that exchange rate volatility impacts the response of policymakers to exchange rate conditions.

Contribution/ Originality
This study assesses how exchange rate volatility impacts foreign exchange policy decisions in emerging and developing economies. We provide evidence that prior literature, which did not consider volatility, missed an important policy concern for central banks in these economies when analyzing the existence of asymmetric preference in foreign exchange intervention.

Keywords:

Asymmetric preferences, Foreign exchange market, Intervention, Emerging markets, Exchange rate volatility, Optimal reaction function, GMM.

Video:

Download Video

Download Audio

Reference:

Dijk, D.V., T. Teräsvirta and P.H. Franses, 2002. Smooth transition autoregressive models—a survey of recent developments. Econometric Reviews, 21(1): 1-47.Available at: https://doi.org/10.1081/etc-120008723.

Edwards, S., 2006. The relationship between exchange rates and inflation targeting revisited. National Bureau of Economic Research Working Paper Series: 1-45.Available at: https://doi.org/10.3386/w12163.

Enders, W., 2010. Applied econometric time series. 3rd Edn., USA: Wiley and Sons, Inc. pp: 407-478.

International Monetary Fund, 2016. Annual Report on Exchange Rate Arrangements and Exchange Restrictions. International Monetary Fund.

Jašová, M., R. Moessner and E. Takáts, 2016. Exchange rate pass-through: What has changed since the crisis? BIS Working Paper Series No. (583).

Keefe, H.G. and H. Shadmani, 2018. Foreign exchange market intervention and asymmetric preferences. Emerging Markets Review, 37: 148-163.Available at: https://doi.org/10.1016/j.ememar.2018.08.001.

Kocenda, E. and B. Varga, 2018. The impact of monetary strategies on inflation persistence. International Journal of Central Banking, 14(4): 229 ̶ 274.

Kremer, S., A. Bick and D. Nautz, 2013. Inflation and growth: New evidence from a dynamic panel threshold analysis. Empirical Economics, 44(2): 861-878.Available at: https://doi.org/10.1007/s00181-012-0553-9.

Luukkonen, R., P. Saikkonen and T. Teräsvirta, 1988. Testing linearity against smooth transition autoregressive models. Biometrika, 75(3): 491-499.Available at: https://doi.org/10.2307/2336599.

Mohanty, M., 2013. Market volatility and foreign exchange intervention in EMEs: What has changed? BIS Paper Series No. 73.

Mohanty, M. and M. Klau, 2004. Monetary policy rules in emerging market economies: Issues and evidence. Bank of International Settlements Working Paper Series No.149.

Ostry, J., A.R. Ghosh and M. Chamon, 2012. Two targets, two instruments: Monetary and exchange rate policies in emerging market economies. IMF Staff Discussion Papers No. (SDN/12/01).

Pontines, R., Victor and S. Ramkishen, 2011. Foreign exchange market intervention and reserve accumulation in emerging Asia: Is there evidence of fear of appreciation. Economics Letters, 111(3): 252-255.Available at: https://doi.org/10.1016/j.econlet.2011.01.022.

Reinhart, C. and K. Rogoff, 2002. The modern history of exchange rate arrangements: A reinterpretation. NBER Working Paper Series No. (8963).

Srinivasan, N., V. Mahambare and M. Ramachandran, 2009. Preference asymmetry and international reserve accretion in India. Applied Economics Letters, 16(15): 1543-1546.Available at: https://doi.org/10.1080/13504850701578942.

Surico, P., 2007. The fed's monetary policy rule and US inflation: The case of asymmetric preferences. Journal of Economic Dynamics and Control, 31(1): 305-324.Available at: https://doi.org/10.1016/j.jedc.2005.11.001.