The effect of central bank interventions on exchange rate instability using the quantile method in Iran

The purpose of this study is to investigate the effect of central bank interventions in the foreign exchange market on exchange rate instability in Iran. Multiple regression method has been used to estimate the research model. The GARCH model (1, 1) has also been used to estimate exchange rate volatility. The Stavarek index was used to calculate the central bank intervention index. The closer the index is to zero, the more flexible the exchange rate is and the closer the exchange rate regime is to floating. If it is one, it indicates that the currency system is completely stable, and if it is between zero and one, it indicates managed and moderate currency regimes. Finally, the closer this index is to one, the greater the degree of market intervention. The time period studied in this research is 1353 to 1396. The results show that firstly in the higher deciles there is a significant relationship between the two indicators of central bank intervention and exchange rate instability; So that from the fifth decile, the intensity increases significantly. Also, in the higher deciles, the rate of exchange rate instability is less effective than the central bank intervention index. In fact, per unit increase in central bank intervention, exchange rate volatility increases in the lower deciles less than in the lower deciles. In general, the central bank intervention index with a coefficient of 0.004 has a positive and significant effect on exchange rate instability. Given the positive effect of central bank interventions on exchange rate volatility, it is suggested that central bank intervention in the foreign exchange market be reduced and the exchange rate system should be changed from floating management to floating mode in order to determine the exchange rate according to its supply and demand by reducing inappropriate policies such as exchange rate pricing.