COVID-19 and the effect of central bank intervention on exchange rate volatility in developing countries: The case of Uganda

Lorna Katusiime; Lorna Katusiime

doi:10.3934/NAR.2023002

National Accounting Review

2023, Volume 5, Issue 1: 23-37. doi: 10.3934/NAR.2023002

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Research article Special Issues

COVID-19 and the effect of central bank intervention on exchange rate volatility in developing countries: The case of Uganda

Lorna Katusiime ^,

Economic Research Department, Bank of Uganda, Kampala 7120, Uganda

Received: 16 August 2022 Revised: 18 December 2022 Accepted: 09 January 2023 Published: 31 January 2023
JEL Codes: C22, E52, E58, F31, I18

The COVID-19 crisis has not only manifested as a tragic public health crisis but also as an unprecedented economic disruption characterized by economic deterioration, the sharp increase in market volatility and the blinding uncertainty about the impact of the pandemic, especially in the context of developing countries. It is therefore not surprising that central banks seeking to maintain macroeconomic and financial stability, which are critical for sustained economic development, have maintained the practice of central bank intervention, especially in developing countries. This paper empirically examines the effect of central bank foreign exchange interventions on the level and volatility of the Uganda shilling / US dollar exchange rate (UGX/USD). Utilizing daily data spanning the period December 30, 2016, to 1 December 2021, we estimate a foreign exchange intervention model within a GARCH theoretical framework. Empirical results indicate that foreign exchange interventions have had mixed impact on the volatility of the exchange rate. In addition, despite generating significant uncertainty, the COVID 19 pandemic adverse shock results in a 0.03 percent appreciation due to Uganda's policy response to the COVID-19 pandemic.
- central bank intervention,
- exchange rate volatility,
- inflation targeting regime,
- COVID-19
Citation: Lorna Katusiime. 2023: COVID-19 and the effect of central bank intervention on exchange rate volatility in developing countries: The case of Uganda, National Accounting Review, 5(1): 23-37. doi: 10.3934/NAR.2023002

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Abstract

The COVID-19 crisis has not only manifested as a tragic public health crisis but also as an unprecedented economic disruption characterized by economic deterioration, the sharp increase in market volatility and the blinding uncertainty about the impact of the pandemic, especially in the context of developing countries. It is therefore not surprising that central banks seeking to maintain macroeconomic and financial stability, which are critical for sustained economic development, have maintained the practice of central bank intervention, especially in developing countries. This paper empirically examines the effect of central bank foreign exchange interventions on the level and volatility of the Uganda shilling / US dollar exchange rate (UGX/USD). Utilizing daily data spanning the period December 30, 2016, to 1 December 2021, we estimate a foreign exchange intervention model within a GARCH theoretical framework. Empirical results indicate that foreign exchange interventions have had mixed impact on the volatility of the exchange rate. In addition, despite generating significant uncertainty, the COVID 19 pandemic adverse shock results in a 0.03 percent appreciation due to Uganda's policy response to the COVID-19 pandemic.

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