Effectiveness of intervention in a small emerging market: an event study approach

This article addresses the effectiveness of intervention using daily data from a small open economy for which intervention constituted an integral part of policy making. A matched-sample test of equality of means before and after intervention events, shows that the sterilized interventions by the central bank were effective for both purchases and sales of US dollars, but with associated fiscal costs. These results, which are robust to alternative event-window definitions and to alternative criteria for measuring ‘success’, suggest that the authorities were successful in keeping the exchange rate within a ‘target’ corridor. With many small emerging market economies seeking to balance the twin objectives of maintaining competitiveness while containing imported inflation, these results present an interesting case study which suggests that intervention can be an appropriate policy tool in some small open and emerging market economies.