Models of foreign exchange intervention: Estimation and testing

We propose a general non-linear simultaneous equations framework for the econometric analysis of models of intervention in foreign exchange markets by central banks in response to deviations of exchange rates from possibly time-varying target levels. We consider efficient estimation of possibly non-linear response functions and tests of functional form, the latter making use of the econometric literature on testing in the presence of nuisance parameters unidentified under a null hypothesis. The methodology is applied in an analysis of recent activity of the Bank of Canada with respect to the Canada-U.S. exchange rat