What Prompts Central Bank Intervention in the Barbadian Foreign Exchange Market?

Jackman, Mahalia (2012): What Prompts Central Bank Intervention in the Barbadian Foreign Exchange Market? Published in: Central Bank of Barbados Economic Review , Vol. 1, No. XXXIX (August 2012): pp. 37-52.

Abstract

The Central Bank of Barbados often intervenes – buys or sells from the foreign exchange (FX) reserves – to ensure the daily clearing of the FX market. This paper estimates an FX intervention function for Barbados using a dynamic complementary log-log model. Three general findings emerged: (i) dynamics play an important role in the Central Bank’s intervention function, meaning that the probability that an intervention takes place today is conditional upon an intervention taking place at least one day prior. This most likely reflects the fact that deficits/surpluses on the FX market tend to be persistent, resulting in intervention over a consecutive number of days; (ii) there appears to be some differences in the response of Central Bank interventions to the other key variables. Particularly, seasonal fluctuations in tourism and interest rate spreads are likely to impact the probability of a sale intervention, but don’t seem to affect the likelihood of a purchase intervention. Moreover, an influx of real estate flows is likely to increase the probability that a purchase intervention takes place, but might have limited impact on the marginal propensity of a sale intervention. Finally, (iii) ‘oil price shocks’ is the only exogenous variable which appears to impact both sale and purchase interventions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign exchange; intervention;fixed exchange rate
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; N - Economic History > N2 - Financial Markets and Institutions > N26 - Latin America ; Caribbean

References

Almekinders, G., & Eijffinger, C. (1994), Daily Bundesbank and Federal Reserve Interventions: Are they a Reaction to Changes in the Level and Volatility of the DM/$-Rate? Empirical Economics, 19, pp. 111-130.

Ballie, R., & Osterberg, W. (1997), Why do Central Banks Intervene? Journal of International Money and Finance, 16(6), pp. 909-919.

Craigwell, R., Jackman, M., & Doyle-Lowe, M. (2011), Non-linearity in the Reaction of the Foreign Exchange Market to Interest Rate Differentials: Evidence from a Small Open Economy with a Long-Term Peg, Paper Presented at CCMF Conference, November, 2011. Forthcoming in Applied Financial Economics.

Frenkel, M., & Stadtman, G. (2001), Intervention Reaction Functions in the Dollar-Deuthschmark Market, Financial Markets and Portfolio Management, 15(3), pp. 328-343.

Harvey, A. (1989), Forecasting Structural Time Series Models and the Kalman Filter, Cambridge: Cambridge University Press.

Herrera, A., & Özbay, P. (2005, January), A Dynamic Model of Central Bank Intervention, Central Bank of the Republic of Turkey Working Paper 05/01.

Ito, T., & Yabu, T. (2007), What Prompts Japan to Intervene in the Forex Market? A New Approach to a Reaction Function, Journal of International Money and Finance, 26, pp. 193-212.

Jackman, M. (2012), Foreign Exchange Intervention in a Small Open Economy with a Long Term Peg, Economics Bulletin, 32, pp. 2207-2219.

Kim, S., & Sheen, J. (2002), The Determinants of Foreign Exchange Intervention by Central Banks: Evidence from Australia, Journal of International Money and Finance, 21, pp. 619-649.

Lorde, T., Lowe, S., & Francis, B. (2010), Do Tourism Receipts Contribute to the Sustainability of Current Account Deficits in Barbados? Central Bank of Barbados Working Papers.

Moore, A. (2011), Demand Elasticity of Oil In Barbados, Energy Policy, 39(6), pp. 3515-3519.

Sarno, L., & Taylor, M. (2001, September), Official Intervention in the Foreign Exchange Market: Is it Effective and, If so, How Does it Work? Journal of Economic Literature, XXXIX, pp. 839-868.

Witter, M., Briguglio, L., & Bhuglah, A. (2002, May 9-10), Measuring and Managing the Economic Vulnerability of Small Island Developing States, Montego Bay, Jamaica.

Worrell, D., Craigwell, R., & Mitchell, T. (2008), The Behaviour of a Small Exchange Market with a Long Term Peg: Barbados, Applied Financial Economics, 19(8), pp. 673-682.

Worrell, D., Doyle-Lowe, M., & Jackman, M. (2011, June), An Analysis of Central Bank Intervention in the Barbadian Foreign Exchange Market, Central Bank of Barbados Economic Review, pp. 46-54