Would Central Banks’ Intervention Cause Uncertainty in the Foreign Exchange Market?

Abstract

This paper investigates the effect of intervention by the central Banks of Australia, Turkey, and Russia on the Australian dollar, the Turkish lira, and the Russian ruble, respectively. This paper covers various sample periods, depending on data availability: Jan. 3, 1989-Dec. 12, 2014 for Australia, Jan. 2, 2002-Dec. 12, 2014 for Turkey, and Jan. 10, 2013-Dec. 10, 2014 for Russia.The econometric method that is used in this paper is the GARCH (1, 1) model. This model is used to measure the effect of intervention by central banks on the volatility of the local currencies for the time periods described. In addition, this paper explores the estimation of the effect of official intervention on the amount of appreciation and deprecation of the three currencies.The findings of this research are that intervention is related to significant volatility and uncertainty in the official exchange rate. This result was found for Australia and Russia but not for Turkey. One possible reason for that may be the nature of the frequency of intervention by the Central Bank of Turkey. In other words, the rare intervention of the central bank was associated with stability in the exchange rate.