| The first chapter shows that during 1999-2012, the Central Bank of Colombia conducted frequent purchases of foreign currency but only occasional and moderate sales. Concurrently, the central bank adjusted its intervention interest rate to meet inflationary targets. However, the use of two simultaneous policy instruments does not necessarily equip monetary authorities with better tools to achieve their targets. On the contrary, their effects can potentially offset each other. Using proprietary data I study the effects of simultaneous policies by first deriving new measures of monetary shocks and then determining their impact on economic activity. The main findings indicate that (i) while interest rate interventions have a significant impact on real and nominal variables, foreign exchange interventions tend to have limited effects; and (ii) empirical anomalies, such as the price puzzle, are eliminated when properly accounting for the systematic responses of policy.;The second chapter uses the exchange rate expectations survey of the Central Bank of Colombia in order to test for the rational expectations hypothesis, the presence of a time-varying risk premium and the accuracy of agents' forecasts. Results indicate that (i) the forward discount rate was generally different from future exchange rate changes due to the rejection of the unbiasedness condition and to a time-varying risk premium, and (ii) while short term forecasts outperform a random walk, long term forecasts fail to do any better. In this sense, traders and analysts could do better by following simple autoregressive models rather than by following the strategy that they pursue today.;Chapter three compares the effects of various foreign exchange intervention mechanisms, using an event study approach. Following the methodology presented in Frankel (1994) and Fatum and Hutchison (2003), we define four criteria to evaluate a successful intervention: 1) Direction, 2) Reversal, 3) Smoothing, and 4) Matching. Our main finding indicates that rule-based volatility options were successful according to all criteria. However, counterfactual exercises cast some doubts on these results when considering three out of the four criteria. |
