Ensayos sobre POLÍTICA ECONÓMICA
Print version ISSN 0120-4483
ECHAVARRIA, Juan José; VASQUEZ, Diego and VILLAMIZAR, Mauricio. Impact of Exchange Rate Interventions on the Level and Volatility of the Colombian Exchange Rate. Ens. polit. econ. [online]. 2010, vol.28, n.62, pp. 12-69. ISSN 0120-4483.
This paper evaluates the determinants of foreign exchange purchases and their impact on the nominal exchange rate in Colombia during the 2000-2008 period. Tobit estimations show that the Central Bank bought foreign exchange in order to compensate day-to-day revaluations and to correct "excessive" trends, when inflation pressures were low and when the Central Bank was a net creditor. We estimate an E-GARCH model to show that foreign exchange purchases increased (devalued) the exchange rate and reduced its volatility, not only in the short term (1 day) but also in the medium term (1 month, 3 months and 6 months). Possible macroeconomic contradictions were not strong enough to affect the reaction function of the authorities or the impact of interventions. We develop some methodologies which allow an evaluation of parameter stability for the mean and volatility equation in the E-GARCH model.
Keywords : exchange rate intervention; central bank reaction function; parameter stability; Tobit estimation; E-GARCH.