This paper analyzes determinants and consequences of FX interventions in the Kyrgyz Republic. Most of the literature on the topic focuses on advanced and emerging economies and this paper provides new evidence from a low-income country. We find that FX interventions take place in response to movements in the exchange rate and its volatility. There is also evidence of “leaning against the wind”, which is more pronounced for relatively larger FX sales and purchases. The “leaning against the wind” is asymmetric toward FX sales and largely reflects leaning against depreciation of domestic currency. We document a varying degree of de-facto exchange rate stability despite the de-jure floating exchange rate regime. During most of the sample, the exchange rate management index was relatively low in line with the floating exchange rate regime, with the exception of the period from 2018 Q4 until the COVID-19 shock, during which the exchange rate management index was relatively high.
This paper characterizes exchange market pressure as a nonlinear Markov-switching phenomenon, and examines its dynamics in response to money growth and inflation over three regimes. The empirical results identify episodes of exchange market pressure in the Kyrgyz Republic and confirm the statistical superiority of the nonlinear regime-switching model over a linear VAR version in understanding exchange market pressure. The nonlinear empirical approach adequately characterizes the data generation process and yields results that are consistent with theoretical predictions, particularly the dampening effect of monetary contraction on depreciation pressure. During periods of appreciation pressure, however, the reverse policy option-monetary expansion-may not be efficient, particularly where PPP rather than UIP drives exchange rates. In addition, monetary expansion in such cases defeats the primary objective of monetary policy-price stability-and may exacerbate the instability.
This paper discusses the significant overall progress with macro stabilization of these transition countries during 1992-1997. While average inflation declined steadily since 1992, output fell significantly for many of these countries during this period, and it was not unti 1996-97 that as a group they experienced positive growth, financial policies, the current account, competitiveness, debt-and non-debt-creating capital flows, and the initial impact of the Asian crisis.