مداخله ارز: مورد مطالعه بازار نوظهور
|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|13692||2013||23 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of International Money and Finance, Volume 37, October 2013, Pages 25–47
Using a unique dataset on daily foreign exchange intervention and a new methodological framework of a latent factor model of central bank intervention, this paper addresses the effects of intervention in an emerging market. Events in financial markets from 2002 to 2010 provide a natural experiment to evaluate the short and medium term objectives of the central bank to contain excessive exchange rate volatility and to accumulate foreign reserves respectively. In the low volatility period in the first part of the sample, the central bank is successful in influencing the currency when pressure is to appreciate, accumulating international reserves. The same model estimated for the global volatility period in the second part of the sample shows the central bank intervening to mitigate excessive exchange rate volatility in line with the short-term objective. The results point to the need to consider the cross currency market interdependence between emerging markets when modeling intervention.
The motives for central banks to intervene in the foreign exchange market include reducing the economic costs associated with exchange rate volatility which affects international trade, financial flows, foreign investment and economic growth, and accumulating international reserves to strengthen a country's macroeconomic fundamentals (Szakmary and Mathur, 1997, Sarno and Taylor, 2001, Disyatat and Galati, 2007 and Pointines and Rajan, 2011). These objectives are particularly important for emerging markets as they are more prone to and affected by external shocks than their developed counterparts. Meanwhile, accumulating international reserves helps to establish the confidence of foreign investors in the domestic economy by positively affecting sovereign risk, and vulnerability to external shocks can be alleviated through a high level of reserve adequacy (Mulder and Perrelli, 2001 and Dominguez et al., 2011). Using a unique dataset on daily foreign exchange intervention and a new methodological framework, this paper addresses the effects of intervention on exchange rate volatility and reserve accumulation for emerging markets using Sri Lanka as an example.1 The officially announced intentions of the Central Bank of Sri Lanka are exactly those mentioned above but with a time frame associated with each objective in that in the short term, intervention is to contain excessive volatility in the exchange rate, and in the medium term is to accumulate international reserves (Central Bank of Sri Lanka, 2007).2 Determining the effects of intervention for emerging markets is constrained by data availability and with the exception of Disyatat and Galati (2007) for the Czech Koruna, there are few published works in this area.3Sarno and Taylor (2001) and Disyatat and Galati (2007) provide good surveys to evaluate intervention and its effects on exchange rate volatility with the conclusions tending to be that intervention can be effective and is conducted mainly in response to a rapidly appreciating domestic currency. From a reserve accumulation perspective, the large stocks of reserves held by emerging markets is now attracting attention following the economic and financial market collapses of the last five years. Important papers examining this issue include Dominguez et al. (2011) and Dominguez (2010). A framework which naturally lends itself to modeling central bank foreign exchange intervention but which has not previously been applied to this topic is the latent factor framework.4 This class of models is often used to calculate volatility decompositions to decompose financial market asset returns into specified sources of volatility associated with the factor structure such as global, domestic, asset market or country factors (Diebold and Nerlove, 1989, Mahieu and Schotman, 1994 and Dungey, 1999). This paper constructs a factor model of intervention for a set of daily currency returns of Sri Lanka and its major trading partners as well as Sri Lankan intervention data which is modeled endogenously. The weight placed on the objectives of a central bank's intervention policy at any point in time is a function of the prevailing external global economic environment, the domestic economic environment including policy regime choices, as well as the general level of development of a country. Our model reflects this environment for an emerging country by specifying each Sri Lankan and trading partner currency return as a function of global, domestic and intervention factors. The global factor affects all currency returns in the model but allows each market to respond in different ways. It captures movements external to the domestic economy and encompasses concepts such as but not exclusively global market fundamentals, global liquidity conditions and general trader risk aversion. A domestic factor is specified for each variable and captures movements specific to each market. Intervention is also a function of global and domestic factors. Using the fact that it is known on which days intervention policy is enacted, an additional intervention factor is specified for the Sri Lankan currency equation which shares features of the net intervention equation. This relationship exists only on days on which the central bank intervenes and the feature of known intervention days is also used as part of the identification of the model. Events in financial markets in the sample period from January 2002 to December 2010 provide a natural experiment to evaluate the short and medium term objectives of the Central Bank. The model is estimated over two periods. The first corresponds to the relative calm and low volatility of financial markets in the first half of the sample, and the second to the period of global volatility associated with the global financial crisis in the second half. If the commitment to the medium term objective of reserve accumulation and the short term objective of reducing exchange rate volatility is met, the volatility decompositions for each period should differ. The data provided distinguishes between days of intervention through net sales and net purchases of US dollars providing further evidence on the commitment of the central bank to each objective. The results suggest that the central bank is successful in achieving its short-term and medium-term objectives of containing exchange rate volatility and accumulating reserves. In the low volatility period, the central bank tends to intervene in response to global rather than domestic factors and is able to influence overall foreign exchange return volatility by 5.5 percent. Splitting the data into days of intervening through purchases versus sales of US dollars shows that intervention is most effective when the bank purchases US dollars. This suggests that the central bank is successful in influencing the exchange rate when the pressure in currency markets is to appreciate the Sri Lankan rupee, hence accumulating international reserves in line with their medium-term target as is expected during a period of calm. The same model estimated for the global volatility period presents strikingly different results. Sales of US dollars is important during this time with the central bank intervening to mitigate the exchange rate volatility in line with the short-term objective. The rest of the paper proceeds as follows. Section 2 presents the exchange rate and intervention data used in the empirical application. The modeling framework is developed in Section 3, and Section 4 discusses the GMM methodology adopted to estimate the models of intervention. Section 5 presents the empirical results, first focusing on the low volatility period and later the global volatility period. This section also considers the role of emerging market factors and explores some of the interdependencies between the regional currency markets on non-intervention compared to intervention days. Section 6 concludes.
نتیجه گیری انگلیسی
Foreign exchange intervention by central banks in emerging economies has only been studied to a limited extent, and the effect of such intervention is not well understood. Using a unique dataset and a new modeling framework, this paper contributed to this literature by estimating a latent factor model of central bank intervention in a multi-country setting. The case study was for the emerging economy of Sri Lanka, whose intervention policy objectives are in the short run to contain excessive exchange rate volatility, and in the medium run to accumulate international reserves. The factor structure provided a convenient method of identifying sources of currency market volatility by decomposing the currency returns of Sri Lanka and Sri Lanka's major trading partners into a set of factors that included global, domestic and intervention factors. The model was identified using information on the absence or presence of intervention on a particular day. The moments of the data on days of no intervention were used to estimate global and domestic factors. The moments of the data on days of intervention were used to estimate structural change to the factor structure on the days of intervention, as well as the effect of pure intervention by the central bank. The advantage of latent factors meant that observable variables did not need to be formally specified. The effectiveness of intervention was assessed over two periods: i) a period of relatively low volatility in global financial markets, from January 2002 to June 2007; and ii) a period of high volatility (a global volatility period), corresponding to the global financial crisis from July 2007 to December 2010. The results were directly linked to the objectives of the central bank listed above. The empirical results were supportive of intervention being effective in Sri Lanka over the two periods, albeit in different ways. The results during both periods showed that the Central Bank of Sri Lanka responded to global movements in currency markets when they intervened, rather than movements specific to the domestic foreign exchange market. This suggests that the central bank attempted to shield the domestic economy from externally sourced fluctuations. In the low volatility period, 11 percent of total volatility was explained by intervention through purchases of US dollars, compared to two percent of volatility in the case of intervention through sales of US dollars. These findings were consistent with the medium-term objective of the Central Bank of Sri Lanka of accumulating foreign exchange reserves, suggesting successful reserves management between 2002 and 2007. In contrast to the dominance of intervention through purchases relative to sales for the low volatility period, the central bank was focused on mitigating excess currency market volatility arising from short-run shocks during the global volatility period in the late part of the sample. The variance decompositions calculated for 2007 to 2010 clearly showed that eleven percent of Sri Lankan currency market volatility was explained by sales of US dollars as the central bank attempted to absorb some of the global turmoil in currency markets through exchange rate management. Finally, the results indicate that intervention of an emerging market may affect, and be affected by currency markets of neighboring emerging markets. The evidence here was for regional emerging market intervention effects, but the results point to the need for a broader investigation of the cross market effects of the emerging market intervention.