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Activity Number: 580 - Time Series and Factor Models
Type: Contributed
Date/Time: Wednesday, August 2, 2017 : 2:00 PM to 3:50 PM
Sponsor: Business and Economic Statistics Section
Abstract #322515 View Presentation
Title: Foreign Exchange Intervention Revisited: a New Way of Estimating Censored Models
Author(s): Luis Melo* and Mauricio Villamizar and Daniel OrdoƱez
Companies: Banco de la Republica (Central Banck of Colombia) and Banco de la Republica (Central Bank of Colombia) and Banco de la Republica (Central Banck of Colombia)
Keywords: CLAD ; Censored models ; Foreign exchange intervention ; Central bank's policy function

Most of the literature on the effectiveness of foreign exchange intervention has yet to reach a general consensus. In part, this is due to the different estimation methods in which exogenous variation is identified. In this paper we allow for a more flexible estimation of policy functions by using a censored least absolute deviation model, applied to a time-series framework. We first corroborate the properties of the estimators that we use through simulation exercises for cases in which: (i) the degree of censoring varies (ii) errors are subject to conditional heteroskedasticity, (iii) the distribution of the errors varies, and (iv) when there are multiple censoring thresholds. The simulation exercises suggest that the estimator used is robust to both conditional heterosckedasticity and heavy tailed distributions in the error term. However, we show that misspecification, when considering a single-valued instead of multiple-valued thresholds, leads to an estimation bias. Finally, we carry out empirical estimations for the case of Turkey and Colombia and compare our findings with the related literature.

Authors who are presenting talks have a * after their name.

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