Foreign exchange market intervention and asymmetric preferences

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“…We estimate the model using Generalized Method of Moments (GMM) with monthly data for 23 emerging market economies from 2000 to 2016. The empirical results confirm the stronger aversion to appreciation as found in Keefe and Shadmani (2018) during the less volatile periods, which occurs only in 16% to 28% of the observations. However, during the more volatile periods, evidence of asymmetric intervention disappears, implying that most policymakers most of the time are simply leaning against exchange rate movements in an attempt to maintain stable exchange rate conditions, rather than demonstrating a consistent aversion to appreciation.…”

“…We follow the empirical model in Keefe and Shadmani (2018) in which the central bank minimizes an asymmetric (non-quadratic) loss function by choosing an optimal level of foreign exchange intervention which results in the following reaction function: 1 Because the degree of exchange rate management varies widely across the panel of countries, we control for the exchange rate regime using a dummy variable. We identify periods for each country where the exchange rate is considered to be floating or non-floating (crawling peg, stabilized arrangement, other managed arrangement) using Reinhart and Rogoff (2002); Kocenda and Varga (2018) and the International Monetary Fund (2016).…”

“…Recent variations of these models that have attracted significant attention are structures in which the planner has asymmetric aversion toward one side of the exchange rate movement. Such analyses have been described in Srinivasan et al (2009); Pontines and Ramkishen (2011); Keefe and Shadmani (2018) among others. Their results have provided evidence of an asymmetric aversion against appreciation for most emerging markets and developing countries.…”

“…We incorporate the dynamic threshold panel analysis presented in Kremer et al (2013) to the optimal reaction function described in Keefe and Shadmani (2018) to investigate the role of exchange rate volatility in foreign exchange intervention. We estimate the model using Generalized Method of Moments (GMM) with monthly data for 23 emerging market economies from 2000 to 2016.…”

Exchange Rate Volatility, Foreign Exchange Market Intervention and Asymmetric Preferences

“…First, each country in the set has shown evidence of a managed floating exchange rate, intervening at times to "lean against the wind". Second, they demonstrate an asymmetry in their response to exchange rate movements as shown in Keefe and Shadmani (2018) for evidence. Data is collected from the IMF International Financial Statistics database.…”