The effectiveness of foreign exchange interventions under a floating exchange rate regime for the Turkish economy: a post-crisis period analysis

Abstract

The reported study has two purposes: first, it attempts to improve the literature on foreign exchange interventions of the central banks for the emerging market economies, an area not previously studied in detail. The Turkish economy in the post-crisis period constitutes a good example in this context. Second, it proposes a new methodology, a time-varying parameter model, to analyse the effectiveness of the foreign exchange interventions. When the results from such an exercise are compared with those obtained from an event-study analysis, it is found that purchase-based interventions seem to be successful, especially after stabilization of the financial markets. In that sense, an asymmetry is detected regarding the effectiveness of interventions. Concerning the relationship between interest rates and exchange rates, it is found that the uncovered interest rate parity condition operates in an unconventional way, supporting the views put forward by recent emerging markets literature.