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February 1, 2017


Daily Currency Interventions in Emerging markets: Incorporating Reserve Accumulation to the Reaction Function


February 1, 2017


DIW Berlin im Quartier 110
Room 3.3.002A
Mohrenstraße 58
10117 Berlin


Michael Frömmel, Ghent University

This study considers emerging market central bank interventions motivated by international reserve management. Emerging market central banks use currency intervention as a policy tool against exchange rate movements and accumulate international reserves as an insurance against sudden stops or reversals in capital flows. To account for both of these motivations, the model of Ito and Yabu (2007), which is exclusively based on exchange rate targeting, is extended to include the international reserves-to-GDP ratio at a daily frequency. Daily values of the ratio are forecast using the Mixed Data Sampling (MIDAS) model and exchange rate returns. Compared with the benchmark model, we find that the MIDAS model performs better in forecasting the reserve-to-GDP ratio. The extended model is estimated by using the floating exchange rate regime period data of Turkey. We identify breaks in the Turkish intervention policy, and the reserve-to-GDP variable in the extended model is found to have a significant role in the intervention reaction function.

Michael Frömmel's CV