The efficacy of foreign exchange market intervention in Malawi

Kisu Simwaka and Leslie Mkandawire

MPRA Paper from University Library of Munich, Germany

Abstract: The Malawi Kwacha was floated in February 1994. Since then, the Reserve Bank of Malawi has periodically intervened in the foreign exchange market. This paper analyses the effectiveness of foreign exchange market interventions carried out by the Reserve Bank of Malawi. We use a GARCH (1, 1) model to simultaneously estimate the effect of intervention on the mean and volatility of the Malawi kwacha. Using monthly exchange rates and official intervention data from January 2002 to February 2006, the empirical results suggest that intervention activities of the Reserve Bank of Malawi affect the kwacha. In line with similar findings elsewhere in the literature, the paper finds that net sales of dollars by the Reserve Bank of Malawi depreciate, rather than appreciate, the kwacha. This effect is very small, however. Moreover, the paper also finds that the Reserve Bank of Malawi intervention reduces the volatility of the kwacha. This shows that the Reserve Bank actually achieves its objective of smoothing out fluctuations of the kwacha. This can be evidenced by the stability of the kwacha during a greater part of 2004. Thus intervention is, to some extent, used as an effective tool for moderating fluctuations of the kwacha. However, its effectiveness is constrained by the amounts of foreign exchange reserves, which are usually low.

Keywords: Foreign Exchange Market; Official Intervention; GARCH (search for similar items in EconPapers)
JEL-codes: E0 E52 E58 (search for similar items in EconPapers)
Date: 2008-06-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Published in African Journal of Economic Policy ISSN 1166-4875.AJEP,(2008): pp. 1-38

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/15946/1/MPRA_paper_15946.pdf original version (application/pdf)

Related works:
Working Paper: The Efficacy of Foreign Exchange Market Intervention in Malawi (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:15946

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().