The relationship between Central Bank interventions and exchange rate in Turkey (1 January 2004 - 30 June 2015)

The rapid and great changes in the exchange rates create uncertainty and this becomes a major issue for the economy of the country. In order to solve this issue, foreign exchange interventions are applied by the Central Banks. These interventions are applied by enduring high costs and using limited foreign exchange reserves. What kind of effects these interventions have on the exchange rates is a matter of concern. Many studies have been made in the world to measure the effect of foreign exchange interventions of central banks on the exchange rates by using various methods. This study aims to measure the relationship between foreign exchange interventions applied by CBRT and the exchange rate and exchange rate volatility by using the Probit, GARCH and E-GARCH models in the period between January 1, 2004 and June 30, 2015. Probit Model was used to measure the incidence of the foreign exchange interventions based on volatility and the deviation from the long term value of the exchange rate. According to the result of the Probit model, it has been determined that the deviation in the exchange rate decreases the probability of purchase interventions and increases the probability of sale interventions for the studied period. Besides this, while the volatility does not have a significant effect on the probability of purchase intervention, it has been observed that it has a significant effect on decreasing the probability of sale intervention. According to the results of the GARCH model, it has been determined that the purchase and sale interventions do not have a significant effect on exchange rate level and exchange rate volatility for the studied period. As a result of the analysis made by setting periods according to changes in monetary policy between January 1, 2004 and June 30, 2015, significant results have been determined for some periods. One of the most common results is that selling interventions increase the exchange rate level. On the other hand, in accordance with the results of E-GARCH model, in the whole period, it has been seen that purchase interventions have significant and positive effect on exchange rate level. Moreover, it has been observed that sale interventions have significant and positive effect on exchange rate volatility. This effect of sale interventions also has been seen in some periods such as pre and post crisis periods. Therefore, it has been suggested that CBRT should avoid from sale interventions. Keywords: Foreign exchange interventions, Exchange rates, Probit, GARCH, EGARCH