The Objective of Central Bank Intervention: The Exchange Rate Level, the Reduction of Exchange Rate Volatility, or Both?: An Analysis of the Peruvian Experience, 1991–1998

This article examines the effectiveness of the intervention policy of the Central Reserve Bank of Peru (BCRP) during the period 1991–1998, focusing on its impact on the exchange rate level and the reduction of exchange rate volatility. Using daily data on interventions in the foreign exchange market, the study empirically evaluates the relationship between these interventions and various monetary policy indicators. Econometric time-series models, including the Granger causality test, are applied, and a GARCH model is estimated to analyze volatility. The results indicate that the BCRP’s interventions in the foreign exchange market do impact the exchange rate level, consistent with the signaling hypothesis, and also contribute to reducing exchange rate volatility, especially during the 1994–1998 subperiod, when structural reforms were implemented. These conclusions suggest that, although the BCRP does not subordinate its monetary policy to exchange rate objectives, its intervention is crucial for stabilizing the exchange rate, providing relevant implications for the design of monetary policies in similar contexts. (Abstract and audio: Department of Economic Publications)