The Impact of Central Bank Interventions in the Spot Market on Foreign Exchange Rates in Emerging Countries

Bassem Haikal, Fordham University


This research aims at assessing the impact of emerging countries’ central bank currency interventions in the spot foreign exchange markets on exchange rates level and volatility. The research employs a purely empirical methodology. First, replicating two econometric models that were introduced in two separate papers: Kearns and Rigobon (2003) – a simultaneous equations model solved by GMM simulation and bootstrapping techniques – and Carvalho (2014) – a state-space model solved using a Markov Chain Monte Carlo (MCMC) algorithm. Then, comparing results obtained from each model to determine which approach is more accurate using the Rengifo-Keefe Accuracy test, a mathematical test that uses exchange rate deviations from a moving average to determine the intervention’s impact on exchange rate movement. This research methodology aims to introduce two main contributions to the literature: a) Applying the aforementioned models to a group of seven emerging countries to examine each country’s forex interventions effectiveness individually, and b) Analyzing obtained results across countries and comparing both models in terms of accuracy and suitability to each country. Results show that Carvalho’s model is significantly more accurate, and thus recommends the use of state-space models to emerging countries’ central bank policy makers. Based on Carvalho’s model results the paper concludes that: a) Emerging markets central bank spot market interventions are effective in controlling exchange rate movements, b) The impact of an intervention varies drastically from one emerging country to another – in both magnitude and direction of change in exchange rate – depending on several factors, c) Central bank intervention frequency is a key determinant of the interventions’ impact on exchange rate & d) Central banks should use large datasets to analyze the impact of their spot market interventions on exchange rate, because the dataset size plays a major role in improving the results accuracy. Finally, the paper suggests that future research should build an extended version of Carvalho’s model to achieve higher accuracy. The improved model should include control variables that capture: a) Degree of central bank intervention policy transparency, b) The country’s forex market size or market turnover& c) Degree of full and immediate sterilization of each intervention studied.

Subject Area

Economics|Finance|Economic theory

Recommended Citation

Haikal, Bassem, "The Impact of Central Bank Interventions in the Spot Market on Foreign Exchange Rates in Emerging Countries" (2017). ETD Collection for Fordham University. AAI10270790.