Can Central Bank Interventions Affect the Exchange Rate Volatility? Multivariate GARCH Approach Using Constrained Nonlinear Programming

This study examines the impact of foreign currency market interventions of the Central Bank of Turkey (CBT) in a multivariate GARCH framework. CBT has switched to the floating exchange rate regime since 2001 crisis and announced that the interventions in the foreign exchange markets are aimed at reducing the volatility of the USD/YTL and EUR/YTL. However the literature documents that, foreign exchange interventions lead to an increase in exchange rate volatility. In an attempt to calculate the volatility, we employ a bivariate GARCH estimation with non-linear constrained optimization (NLP) [22] and BEKK [3] on the USD/YTL and EUR/YTL. Our results shed some doubt about the efficiency of these interventions in stabilizing the Turkish Lira market.