Official Foreign Exchange Interventions in the Czech Republic: Did They Matter?

This paper studies the impact of daily official foreign exchange interventions on the Czech koruna’s exchange rate vis-à-vis the euro (German mark prior to 1999) from 1997 to 2002. Using both the event study methodology and a variety of GARCH models reveal that central bank interventions, especially koruna purchases were fairly ineffective from 1997 to mid-1998 compared to the size of the interventions. However, from mid-1998 to 2002, koruna sales were surprisingly effective in either smoothing the path of the exchange rate or even reversing the appreciating trend up to 60 days. Higher volatility triggered koruna purchases in the period from 1997 to mid-1998, which in turn leads to higher volatility. This suggests that the CNB tried in vain to calm the markets after the currency crisis. Koruna sales simply yield more forex rate volatility, a by-product of the monetary authorities’ efforts to counter excessive appreciation.