Foreign exchange intervention and equilibrium real exchange rates

Abstract

Monetary authorities intervene in the currency markets in order to pursue a monetary rule and/or to smooth exchange rate volatility caused by speculative attacks. In the present paper we investigate for possible intervention effects on the volatility of nominal exchange rates and the estimated equilibrium behaviour of real exchange rates. The main argument of the paper is that omission of intervention effects -when they are significant -would bias the ability to detect any PPP-based behaviour of the real exchange rates in the long run. Positive evidence for this argument comes from the experience of six Central and Eastern European economies, whose exchange markets are characterised by frequent interventions.

Optimum currency areas, structural changes and the endogeneity of the OCA criteria: evidence from six new EU member states

“…The results thus imply that there is no evidence for PPP -at its strong version -linking any of the economies under consideration with Germany, the US and the eurozone. These results are in line with the findings on studies examining the behaviour of real exchange rates and the validity of PPP in Central and Eastern European economies for the recent period (see, inter alia, Christev and Noorbakhsh, 2000;Dibooglu and Kutan, 2001;Sideris, 2006bSideris, , 2008Beko and Borsic, 2007;Hsing, 2008). 5…”

“…The second aim is to examine whether the introduction of the euro and the decision of the six countries to join the eurozone had any impact on fostering their integration with the euro area. We argue that the decision of (2007) and Sideris (2008). 10 The role of regulated prices is shown to be significant for the behaviour of the real exchange rates of Hungary and Slovakia in MacDonald and Wojcik (2004).…”

“…5 A number of reasons have been offered in the literature to explain the empirical failure of PPP at its strong version (for a survey, see, inter alia, Taylor, 2006). The reasons include: problems due to productivity differentials -the Balassa-Samuelson effect -(see, inter alia, Lothian and Taylor, 2008) measurement errors, (see, inter alia, Taylor, 1988), aggregation problems (see, inter alia, Taylor, 2001), the effects of interventions in the foreign exchange markets, (see, inter alia, Sideris, 2008), the effects of home bias (Mylonidis and Sideris, 2008).…”

Unremunerated reserve requirements, exchange rate volatility, and firm value

“…These findings suggest that the effect of exchange rate volatility on stock returns becomes stronger for some firms and weaker for others during the unremunerated reserve requirement period. Taken together, the results in this paper improve our understanding of the behavior of exchange rate volatility during the period of the unremunerated reserve requirement, complementing the literature on exchange rate volatility (see e.g., Beine et al, 2009;Edwards and Rigobon, 2009;Ganguly and Breuer, 2010;Sideris, 2008). The paper also complements and expands the literature on the influence of capital account restrictions on firms (see e.g., Prati et al, 2009;Vithessonthi and Tongurai, 2010;Wei and Zhang, 2007).…”

Determinants of the real exchange rate in a small open economy: Evidence from Canada

“…Husted and MacDonald (1998), using panel data, provide supportive evidence for US dollar, German mark and Japanese yen bilateral exchange rates. Sideris (2008), using the data of six Central and Eastern European countries, shows PPP holds when the official intervention in the exchange market is incorporated. However, the study finds that the real exchange rate is nonstationary for five of these countries.…”