The Effect of Central Bank Intervention on the Exchange Rate of the Tunisian Dinar in Relation to the European Currency

The aim of this paper is to specify a modelling procedure which uses simultaneous equations system to assess exchange rate, conditional volatility and a reaction function of the Central Bank in order to take into account the interdependence prevailing these variables. To this effect, we use a Generalised Method of Moments on high frequency data for the period spreading over 1999-2006. During this period, we find that the interventions of the Central Bank of Tunisia record a significant effect on the return of the rate, yet accompanied with a high tendency of exchange rate fluctuations persistency, which measured by the volatility of the exchange rate. Key words: Central banking intervention, exchange return and exchange rate volatility