Foreign Exchange Intervention and Exchange Rate Volatility: Evidence from Turkey

Abstract

This paper investigates the effects of foreign exchange intervention by the Central Bank of the Republic of Turkey on the behavior of exchange rates during the float period starting with 2001 crisis. Even though the bank is apparently quite willing to intervene the foreign exchange market during the float period, the results suggest that intervention policies are completely ineffective. More specifically, the purchases operations do not have any statistically significant impact on the exchange rate returns and volatility while the central bank intervention sales exert an incorrectly signed effect on the levels of exchange rates and tend to raise volatility of exchange rates returns. Hence, the bank should avoid intervening foreign currency markets. Additionally, the tightening monetary policy in the form of rising the short run interest rates is effective for positive exchange rates returns; but not for dampening the volatility.

Current account imbalances and exchange rate volatility: Empirical evidence from Indonesia

“…The sufficiency of foreign reserves in Chile is more sound to manage exchange rate volatility primarily when the level of the exchange rate is high (Hansen & Morales, 2019). Meanwhile, the foreign reserves stock in Turkey is completely ineffective to overcome exchange rate volatility and its movements (Tümtürk, 2019).…”