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Working paper

A Simple Theoretical Setup for the Evaluation of Sterilized Intervention Effectiveness in a Small Open Commodity Exporting Economy

This paper constructs a theoretical general equilibrium model for exchange rate determination in a small open commodity exporting economy based on an imperfect capital market a la Gabaix-Maggiori and appropriate for estimation on high frequency data and could be used for the evaluation of sterilized intervention effectiveness. To find empirical confirmation of the theoretical setup validity I use Russian daily statistics to estimate the model and investigate the reaction of the Russian ruble-US dollar exchange rate to sterilized interventions in the form of foreign currency repo auctions conducted by the Bank of Russia in the period of 2014-2017. I also estimate a vector error correction model on the same dataset and use it as important empirical benchmark for the theoretical model. The empirical analysis revealed a temporary statistically significant effect of sterilized intervention on exchange rate level, which peaked eight working days after the auction day. The combination of theoretical and empirical approaches demonstrates the effectiveness of the portfolio and the ineffectiveness of signalling channels in the transmission mechanism of the sterilized intervention instrument in Russian case