The effectiveness of foreign exchange interventions under a floating exchange rate regime for the Turkish economy: a post-crisis period analysis

Abstract

The reported study has two purposes: first, it attempts to improve the literature on foreign exchange interventions of the central banks for the emerging market economies, an area not previously studied in detail. The Turkish economy in the post-crisis period constitutes a good example in this context. Second, it proposes a new methodology, a time-varying parameter model, to analyse the effectiveness of the foreign exchange interventions. When the results from such an exercise are compared with those obtained from an event-study analysis, it is found that purchase-based interventions seem to be successful, especially after stabilization of the financial markets. In that sense, an asymmetry is detected regarding the effectiveness of interventions. Concerning the relationship between interest rates and exchange rates, it is found that the uncovered interest rate parity condition operates in an unconventional way, supporting the views put forward by recent emerging markets literature.

Acknowledgements

We thank Fatih Ozatay, Mark Griffiths and participants in an informal departmental seminar for valuable discussions, comments, and suggestions. We are also grateful to the Markets Department of the Central Bank of Turkey for providing us with the data. The views in this paper, and any errors and omissions, should be regarded as those of the authors, do not necessarily reflect the individuals listed above, and the Central Bank of the Republic of Turkey.

Notes

¹ Domac and Mendoza (2002), Agcaer (2003), Guimaraes and Karacadag (2004), Herrera and Ozbay (2005) are exceptions.

² Event study is discussed by MacKinlay (1997) in detail.

³ The sales in 2001 were mostly in the form of auctions.

⁴ We primarily focus on the success of the interventions; therefore, the pure auctions, whose primary aim is to accumulate international reserves, are not analysed.

⁵ Between the dates of 12 May 2003 and 25 September 2003, The CBRT purchased a total of 4.2 billion US dollars, and gradually decreased the overnight borrowing rate from 41 to 29%.

⁶ CBRT sold only 12 million US dollar in total in 2002.