Abstract
This paper discusses the effectiveness in Brazil of the traditional instrument of exchange rate intervention (spot interventions) as well as an instrument based on exchange rate derivatives (foreign exchange swaps). We show that these instruments are capable of affecting the conditional mean of the process of the nominal exchange rate throughout our sample period, from January 2006 to April 2016. Our results are robust to different techniques of estimation (GMM in continuous time and in discrete time), specifications and sample periods.
Highlights
Our objective, in this paper, is to analyze the effectiveness of the intruments that the Central Bank of Brazil adopted to intervene in the foreign exchange market from January 2006 to April 2016
We follow a literature of interventions of central banks in the foreign exchange market (Sarno and Taylor; 2001) and another literature that models the dynamics of foreign exchange rates using continuous time models (Erdemlioglu et al.; 2015)
We model the dynamics of the foreign exchange rate as jump-diffusion processes, considering spot and foreign exchange swap interventions of the CBB as jump processes
Summary
The Hansen and Scheinkman (1995) technique is different from the usual practice of GMM because of the following reasons: the asymptotic identification is not obvious; the identification in small sample, uniqueness and the existence of an estimator is not an autonomous problem with respect to the asymptotic identification; the lack of asymptotic identification is such that implies lack of small sample identification. The authors’ intent is to characterize the infinitesimal generator and to find the moment conditions related to this generator. The authors analyze asymptotic proprieties of the infinitesimal generator and find moment conditions that assure that the law of large numbers and the central limit theorem apply to processes whose samples are discrete and obtained in regular intervals. Hansen and Scheinkman (1995) is used for the estimation of strictly stationary continuous time processes, observed in regular discrete time intervals whose frequencies are normalized to one. Let Q be the true distribution of probability of the stationary stochastic process Xt defined over Rn: L2(Q) denotes the set of Q-square integrable functions from Rn to R. Given a semigroup Tt over L2(Q), we can define: A.2.3 Definition of a set of test functions φ.
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