Unveiling the Effects of Foreign Exchange Intervention : A Panel Approach

We study the effect of foreign exchange intervention on the exchange rate relying on aninstrumental-variables panel approach. We find robust evidence that intervention affects thelevel of the exchange rate in an economically meaningful way. A purchase of foreign currencyof 1 percentage point of GDP causes a depreciation of the nominal and real exchange rates inthe ranges of [1.7-2.0] percent and [1.4-1.7] percent respectively. The effects are found to bequite persistent. The paper also explores possible asymmetric effects, and whethereffectiveness depends on the depth of domestic financial markets.