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Periodical article Periodical article Leiden University catalogue Leiden University catalogue WorldCat catalogue WorldCat
Title:The efficacy of official intervention in the foreign exchange market in Malawi
Authors:Simwaka, KisuISNI
Mkandawire, LeslieISNI
Periodical:African Development Review (ISSN 1467-8268)
Geographic term:Malawi
Subjects:foreign exchange
monetary policy
exchange rates
External link:https://onlinelibrary.wiley.com/doi/10.1111/j.1467-8268.2012.00313.x/pdf
Abstract:Most central banks, especially in developing countries, use foreign exchange market intervention as a policy tool for macroeconomic stabilization. In Malawi, the exchange rate was floated in February 1994. Since then, the Reserve Bank of Malawi (RBM) has periodically intervened in the foreign exchange market. In line with the IMF conditions under the structural adjustment package, the RBM has also intervened to buy foreign exchange in order to build up reserves for the Government and moderate exchange rare fluctuations. This paper analyses the effectiveness of foreign exchange market interventions by the RBM for the period 1995-2008. The authors use a GARCH model to simultaneously estimate the effect of intervention on the mean and volatility of the Malawi currency, the kwacha. Results from the GARCH model indicate that net sales of US dollars by the RBM 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 that RBM intervention in the market stabilizes the kwacha. In general, results for the entire study period show that the RBM 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. Ann., bibliogr., notes, ref., sum. [Journal abstract, edited]