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Foreign Exchange Intervention Revisited: A New Way of Estimating Censored Models

Author

Listed:
  • Daniel Ordoñez-Callamand
  • Mauricio Villamizar-Villegas

    (Banco de la República de Colombia)

  • Luis F. Melo-Velandia

    (Banco de la República de Colombia)

Abstract
Most of the literature on the effectiveness of foreign exchange intervention has yet to reach a general consensus. In part, this is due to the different estimation methods in which exogenous variation is identified. In this sense, the use of heavily-dependent parametric models can sometimes condition the validity of results. In this paper we allow for a more flexible estimation of policy functions by using a censored least absolute deviation model, applied to a time-series framework. We first corroborate the properties of the estimators that we use through simulation exercises for cases in which: (i) the degree of censoring varies, (ii) errors are subject to conditional heteroskedasticity, (iii) the distribution of the errors varies, and (iv) when there are multiple censoring thresholds. The simulation exercises suggest that the estimator used is robust to both conditional heterosckedasticity and heavy tailed distributions in the error term. However, we show that misspecification, when considering a single-valued instead of multiple-valued thresholds, leads to an estimation bias. Finally, we carry out empirical estimations for the case of Turkey and Colombia and compare our findings with the related literature.

Suggested Citation

  • Daniel Ordoñez-Callamand & Mauricio Villamizar-Villegas & Luis F. Melo-Velandia, 2016. "Foreign Exchange Intervention Revisited: A New Way of Estimating Censored Models," Borradores de Economia 972, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:972
    DOI: 10.32468/be.972
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    as
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    Cited by:

    1. Markus Hertrich, 2022. "Foreign exchange interventions under a minimum exchange rate regime and the Swiss franc," Review of International Economics, Wiley Blackwell, vol. 30(2), pages 450-489, May.
    2. Ordoñez-Callamand, Daniel & Hernandez-Leal, Juan D. & Villamizar-Villegas, Mauricio, 2018. "When multiple objectives meet multiple instruments: Identifying simultaneous monetary shocks," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 78-101.
    3. Grabowski, Wojciech & Welfe, Aleksander, 2020. "The Tobit cointegrated vector autoregressive model: An application to the currency market," Economic Modelling, Elsevier, vol. 89(C), pages 88-100.
    4. Wenbo Wang & Dieu Thanh Le & Hail Park, 2020. "Is Foreign Exchange Intervention a Panacea in Diversified Circumstances? The Perspectives of Asymmetric Effects," Sustainability, MDPI, vol. 12(7), pages 1-20, April.

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    More about this item

    Keywords

    CLAD; Censored models; Foreign exchange intervention; Central bank's policy function;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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