Central bank intervention and exchange rates: the case of Sweden

Abstract

Abstract This paper examines the effect of the Riksbank's currency market interventions on the level and volatility of the SEK/USD and SEK/DEM exchange rates between 1993 and 1996. This is the first study investigating effects on the Swedish krona after the currency peg was abandoned in 1992. To model volatility, both GARCH models and implied volatilities from currency options are used. Some support is found for the idea that interventions affect the exchange-rate level during certain sub periods but, overall, the results are weak. Furthermore, in line with the findings for other countries, little empirical support is found for the hypothesis that central bank intervention systematically decreases exchange rate volatility.