Journal of
Economics and International Finance

  • Abbreviation: J. Econ. Int. Finance
  • Language: English
  • ISSN: 2006-9812
  • DOI: 10.5897/JEIF
  • Start Year: 2009
  • Published Articles: 348

Full Length Research Paper

Official intervention in the foreign exchange market in Malawi: Evidence from GARCH and equilibrium exchange rate methods

Kisu Simwaka
Reserve Bank of Malawi, Malawi.
Email: [email protected]

  •  Accepted: 07 June 2011
  •  Published: 31 July 2011

Abstract

This paper analyses the effectiveness of foreign exchange market interventions by the Reserve Bank of Malawi (RBM). The study uses a GARCH (1,1) model to simultaneously estimate the effect of intervention on the mean and volatility of the Malawi Kwacha. The study also run an equilibrium exchange rate model and uses the equilibrium exchange rate criterion to compare results with those from GARCH model. Results from the GARCH model indicate that net sales of US dollars by the Reserve Bank of Malawi depreciate, rather than appreciate, the Kwacha. Empirically, this implies the RBM ‘leans against the wind,’ that is, the RBM intervenes to reduce, but not reverse, exchange rate depreciation. On the other hand, results for the GARCH model for the post-2003 period indicate the RBM intervention in the market stabilizes the Kwacha. In general, results from both GARCH and real equilibrium exchange rate criterion for the entire study period show that the Reserve Bank of Malawi interventions have been associated with increased exchange rate volatility, with the only exception being the post-2003 period. The implication of this finding is that intervention can only have a temporary influence on the exchange rate.

 

Key words: Foreign exchange market, official intervention, GARCH, equilibrium exchange rate