A test for the presence of central bank intervention in the foreign exchange market with an application to the Bank of Canada |
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Authors: | Douglas J Hodgson |
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Institution: | (1) Sciences Po and CEPR, 27 rue Saint-Guillaume, 75007 Paris, France |
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Abstract: | In this article, a general nonlinear simultaneous equations framework for the econometric analysis of models of intervention
in foreign exchange markets by central banks in response to deviations of exchange rates from target levels is proposed. The
instrumental variables estimation of possibly nonlinear response functions and tests of intervention, when the functional
form may be nonlinear, asymmetric, and may contain unknown shape parameters, is considered. The methodology applies techniques
developed for testing in the presence of nuisance parameters unidentified under a null hypothesis to a nonlinear simultaneous
equations model. The results of an empirical analysis of stabilization activity of the Bank of Canada, for the period from
1953 to 2009, with regard to the Canada–U.S exchange rate are reported here. A nonlinear specification is found necessary
to capture activity after 1998. |
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Keywords: | |
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