Abstract
This paper studies the effectiveness of FX interventions within an inflation targeting context. I estimate the central bank reaction function, using a friction model à la Rosett. Then, I use the conditional expectation of intervention, as an instrument for actual interventions in a reduced form model of exchange rate daily-returns. Results show evidence of threshold effects in the reaction function, and indicate that intervention had a dampening effect over the daily exchange rate return's volatility, but no influence over the level of exchange rate. The central bank reacted systematically to previous-day exchange rate changes and to deviations from short-term trends.
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