FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability

FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability
Author: Mr.Damiano Sandri
Publisher: International Monetary Fund
Total Pages: 24
Release: 2020-06-12
Genre: Business & Economics
ISBN: 1513547666

We analyze the profitability of FX swaps used by the central bank of Brazil to shed light on the rationale for FX intervention. We find that swaps are profitable in expectation, suggesting that FX intervention is used to stabilize the exchange rate in the face of temporary excessive movements rather than to manipulate it away from fundamental values. In line with this interpretation, we find that the scale of FX intervention responds to the degree of exchange rate misalignment relative to UIP conditions. We also document that intervention is more aggressive when there is less uncertainty about the medium-term level of the exchange rate and when the exchange rate is overvalued rather than undervalued.

Foreign Exchange Intervention under Policy Uncertainty

Foreign Exchange Intervention under Policy Uncertainty
Author: Gustavo Adler
Publisher: International Monetary Fund
Total Pages: 40
Release: 2016-03-17
Genre: Business & Economics
ISBN: 1475520417

We study the use of foreign exchange (FX) intervention as an additional policy instrument in an environment with learning, where agents infer the central bank policy rules from its policy actions. Under full information, a central bank focused on stabilizing output and inflation can achieve better outcomes by using FX intervention as an additional policy tool. Under policy uncertainty, where agents perceive that monetary policy may also have exchange rate stabilization goals, the use of FX intervention entails a trade-off, reducing output volatility while increasing inflation volatility. While having an additional policy tool is always beneficial, we find that the optimal magnitude of intervention is higher in monetary policy regimes with lower uncertainty. These results indicate that the benefits of using FX intervention as an additional stabilization tool are greater in regimes where monetary policy is credibly focused on output and inflation stabilization.

Foreign Exchange Intervention Rules for Central Banks: A Risk-based Framework

Foreign Exchange Intervention Rules for Central Banks: A Risk-based Framework
Author: Romain Lafarguette
Publisher: International Monetary Fund
Total Pages: 33
Release: 2021-02-12
Genre: Business & Economics
ISBN: 1513569406

This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating exchange rate arrangements. The FXI rule addresses a market failure: the absence of hedging solution for tail exchange rate risk in the market (i.e. high volatility). Market impairment or overshoot of exchange rate between two equilibria could generate high volatility and threaten financial stability due to unhedged exposure to exchange rate risk in the economy. The rule uses the concept of Value at Risk (VaR) to define FXI triggers. While it provides to the market a hedge against tail risk, the rule allows the exchange rate to smoothly adjust to new equilibria. In addition, the rule is budget neutral over the medium term, encourages a prudent risk management in the market, and is more resilient to speculative attacks than other rules, such as fixed-volatility rules. The empirical methodology is backtested on Banco Mexico’s FXIs data between 2008 and 2016.

The Cost of Foreign Exchange Intervention

The Cost of Foreign Exchange Intervention
Author: Gustavo Adler
Publisher: International Monetary Fund
Total Pages: 37
Release: 2016-04-12
Genre: Business & Economics
ISBN: 148433230X

The accumulation of large foreign asset positions by many central banks through sustained foreign exchange (FX) intervention has raised questions about its associated fiscal costs. This paper clarifies conceptual issues regarding how to measure these costs both from an ex-post and an ex-ante (relevant for decision making) perspective, and estimates both marginal and total costs for 73 countries over the period 2002-13. We find ex-ante marginal costs for the median emerging market economy (EME) in the inter-quartile range of 2-5.5 percent per year; while ex-ante total costs (of sustaining FX positions) in the range of 0.2-0.7 percent of GDP per year for light interveners and 0.3-1.2 percent of GDP per year for heavy interveners. These estimates indicate that fiscal costs of sustained FX intervention (via expanding central bank balance sheets) are not negligible.

Initiating a True International Currency

Initiating a True International Currency
Author: Abdurrahman Arum Rahman
Publisher: Global Currency Initiative
Total Pages: 578
Release: 2021-12-13
Genre: Business & Economics
ISBN:

The US dollar and the euro are not true international currencies, but the currencies of the United States and the Euro, which are “adopted” into international currencies. We designed a truly international currency that is controlled jointly by all (member) countries in the world in a democratic and decentralized manner. The name of the system is organic. The organic system issues an international currency called organic currency. The organic currency is only for international transactions between member countries. Meanwhile, domestic transactions still use their respective national currencies. This system can provide international currency and FX reserves to all (member) countries in the world for free. This system can free all countries from government foreign debt, maintain a balance of payments, make the international monetary system stable, and eliminate the monetary crisis from its roots. This system can start from a small scale, such as ASEAN, South Asia, East Asia, Middle East, Latin America, East Africa, West, Central, and other regions. Unlike the Euro model, this system does not require economic integration. So all countries in the world can join in their condition as they are. In this third edition book, we deepen the theory, improve the plot, sharpen the analysis, add examples, remove some less essential parts, and add references to raise academic standards. We maintain a very simple writing system, easy to read, accompanied by empirical examples and easy-to-understand illustrations. We want the discussion of the international economic and monetary system to be “friendly” for all and “not scary”. We avoid very technical terms. Even if there are, we always provide very simple explanations and illustrations. Everyone can read this book. Because international currency is of public interest. Every individual on earth has the right to know clearly.

Uncovering CIP Deviations in Emerging Markets: Distinctions, Determinants and Disconnect

Uncovering CIP Deviations in Emerging Markets: Distinctions, Determinants and Disconnect
Author: Mr. Eugenio M Cerutti
Publisher: International Monetary Fund
Total Pages: 49
Release: 2023-02-10
Genre: Business & Economics
ISBN:

We provide a systematic empirical treatment of short-term Covered Interest Parity (CIP) deviations for a large set of emerging market (EM) currencies. EM CIP deviations have much larger volatilities than most G10 currencies and move in an opposite direction during global risk-off episodes. While off-shore EM CIP deviations are sensitive to changes in FX dealers’ risk-bearing capacities and global risk aversion, on-shore EM CIP deviations are largely unresponsive in segmented FX markets. Moreover, the sensitivity of offshore EM CIP deviations to global risk factors for currencies with segmented FX markets is stronger compared to their counterparts with integrated FX markets. We find weak evidence of country default risk affecting EM CIP deviations after accounting for global factors.

The Relative Effectiveness of Spot and Derivatives Based Intervention

The Relative Effectiveness of Spot and Derivatives Based Intervention
Author: Milan Nedeljkovic
Publisher: International Monetary Fund
Total Pages: 35
Release: 2017-01-24
Genre: Business & Economics
ISBN: 1475571038

This paper studies the relative effectiveness of foreign exchange intervention in spot and derivatives markets. We make use of Brazilian data where spot and non-deliverable futures based intervention have been used in tandem for more than a decade. The analysis finds evidence in favor of a significant link between both modes of intervention and the first two moments of the real/dollar exchange rate. As predicted by theory for the case of negligible convertibility risk, the impact of spot market intervention in our baseline sample is strikingly similar to that achieved through futures based intervention worth an equivalent amount in notional principal.

Macroeconomics for Professionals

Macroeconomics for Professionals
Author: Leslie Lipschitz
Publisher: Cambridge University Press
Total Pages: 312
Release: 2019-01-23
Genre: Business & Economics
ISBN: 1108568467

Understanding macroeconomic developments and policies in the twenty-first century is daunting: policy-makers face the combined challenges of supporting economic activity and employment, keeping inflation low and risks of financial crises at bay, and navigating the ever-tighter linkages of globalization. Many professionals face demands to evaluate the implications of developments and policies for their business, financial, or public policy decisions. Macroeconomics for Professionals provides a concise, rigorous, yet intuitive framework for assessing a country's macroeconomic outlook and policies. Drawing on years of experience at the International Monetary Fund, Leslie Lipschitz and Susan Schadler have created an operating manual for professional applied economists and all those required to evaluate economic analysis.