Foreign Exchange Intervention and Exchange Rate Volatility in Peru

Abstract

Flexible exchange rate experience in Peru has been accompanied by frequent official interventions in the form of foreign exchange purchases or sales. Monetary authority pursues reducing excess volatility in the exchange rate through its direct intervention. However, in recent years, this intervention has concentrated in US dollars purchases, apparently signaling a bias towards defending a given exchange rate level (not necessarily fixed). For the period 1994 - 2007, this document assesses consistency of the empirical evidence with the goal of reducing exchange rate volatility. Thus, it uses univariate and multivariate time series models subject to stochastic shifts to study currency pressures. Results suggest consistency with the reduced-volatility goal. Nonetheless, in line with other studies, factors such as the foreign exchange gap with respect to its trend also induce foreign exchange intervention.Foreign Exchange Intervention, Exchange Rate Volatility, Markov-Switching Models.