Solving Endogeneity in Assessing the Efficacy of Foreign Exchange Market Interventions

This paper evaluates the efficacy of the sterilized foreign exchange rate intervention while mitigating the pervasive endogenous bias in the intervention literature. In an attempt to solve the endogeneity problems, this paper utilizes customer trade data to identify the system of equations. By estimating the various model speciffications, including the Markov-switching policy function, the results show that the interventions undertaken by the Bank of Korea were eyacute;ective during 2001 and 2002. Speciffically, the volatile market induced the Bank of Korea to intervene, and the interventions decreased the standard deviation of the changes in the Korean won rate from 5.683~5.793 to 5.676