Is There Room for Foreign Exchange Interventions Under an Inflation Targeting Framework? Evidence from Mexico and Turkey

The salient characteristics of emerging market economies coupled with the increasing adoption of inflation targeting in these countries has stimulated much debate about the role of the exchange rate in inflation targeting regimes. The authors aim at shedding more light on this issue by investigating whether central bank foreign exchange interventions have had any impact on the volatility of the exchange rate in Mexico and Turkey since the adoption of the floating regime. To this end, their study, using daily data on foreign exchange intervention, employs an Exponential GARCH framework. Empirical results suggest that both the amount and frequency of foreign exchange interventions have decreased the volatility of the exchange rates in these countries. The authors' findings corroborate the notion that if foreign exchange interventions are carried out with finesse and sensibly-that is, not to defend a particular exchange rate-they could play a useful role in containing the adverse effects of temporary exchange rate shocks on inflation and financial stability.

Bibliographic Details

Main Authors:	Domaç, Ilker, Mendoza, Alfonso
Language:	English en_US
Published:	World Bank, Washington, D.C. 2004-04
Subjects:	EMERGING MARKET ECONOMIES, INFLATION, CENTRAL BANKS, FOREIGN EXCHANGE, FLOATING EXCHANGE RATES, EXCHANGE RATE REGIMES, FINANCIAL STABILITY ADVERSE EFFECTS, BALANCE OF PAYMENTS, BANCO DE MEXICO, BONDS, CAPITAL ACCOUNT, CAPITAL FLIGHT, CENTRAL BANK, DEBT, ECONOMIC REFORM, EMPIRICAL STUDIES, EXCESS DEMAND, EXCHANGE MARKET INTERVENTION, EXCHANGE RATE, EXCHANGE RATE POLICY, EXCHANGE RATES, EXOGENOUS SHOCKS, EXOGENOUS VARIABLES, FINANCIAL CRISIS, FINANCIAL STABILITY, FLOATING EXCHANGE RATE, FLOATING EXCHANGE RATE REGIME, FOREIGN CURRENCY, FOREIGN EXCHANGE INTERVENTION, FOREIGN EXCHANGE INTERVENTIONS, FOREIGN EXCHANGE MARKET, FOREIGN EXCHANGE MARKETS, FOREIGN EXCHANGE RATE, FOREIGN EXCHANGE RATES, FOREIGN EXCHANGE RESERVES, FOREIGN EXCHANGE SALES, FOREIGN EXCHANGE SWAPS, FOREIGN INTEREST RATES, FOREIGN MARKET, HIGH VOLATILITY, IMPERFECT SUBSTITUTES, INDUSTRIAL COUNTRIES, INFLATION RATE, INFLATION TARGETING, INFLATION TARGETS, INTEREST RATE, INTEREST RATES, INTERNATIONAL MARKETS, INTERNATIONAL RESERVES, LIQUIDITY, LIQUIDITY MANAGEMENT, LOCAL CURRENCY, LONG RUN, MARKET CONDITIONS, MARKET ECONOMIES, MAXIMUM LIKELIHOOD METHOD, MEXICAN PESO, MONETARY AGGREGATES, MONETARY AUTHORITIES, MONETARY POLICY, MONETARY POLICY FRAMEWORK, MONEY MARKET, NOMINAL ANCHOR, OUTPUT, PESOS, POLICY RESEARCH, PORTFOLIO, PRICE STABILITY, RANDOM WALK, RATE OF INFLATION, RISK PREMIUM, SECURITIES, STABILIZATION, TRANSMISSION MECHANISM, TREASURY, YEN,
Online Access:	http://documents.worldbank.org/curated/en/2004/04/4132260/room-foreign-exchange-interventions-under-inflation-targeting-framework-evidence-mexico-turkey https://hdl.handle.net/10986/14109
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