› › Foreign Exchange Intervention In Emerging Market Economies

The Cost of Foreign Exchange Intervention

Author : Gustavo Adler

Publisher : International Monetary Fund

Page : 37 pages

File Size : 26,31 MB

Release : 2016-04-12

Category : Business & Economics

ISBN : 148433230X

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Book Description

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.



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

Author : Romain Lafarguette

Publisher : International Monetary Fund

Page : 33 pages

File Size : 16,54 MB

Release : 2021-02-12

Category : Business & Economics

ISBN : 1513569406

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Book Description

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.



Foreign Exchange Intervention: A Dataset of Public Data and Proxies

Author : Gustavo Adler

Publisher : International Monetary Fund

Page : 67 pages

File Size : 21,44 MB

Release : 2021-02-19

Category : Business & Economics

ISBN : 1513566679

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Book Description

Foreign exchange intervention (FXI) is a highly debated topic. Yet, comprehensive and comparable data on FXI is hard to find. This paper provides a new dataset of FXI covering a large number of countries over the period 2000-20 at monthly and quarterly frequencies. It includes publicly available data for about 40 countries and carefully constructed proxies for 122 countries. Proxies are focused on both spot and derivative transactions that alter the central bank’s foreign currency position and account for a wide range of central bank operations, including vis-à-vis residents, the first proxy to do so to our knowledge. The paper discusses the merits of the new proxy relative to coarser measures traditionally used like the change in reserves, and potential definitional differences with published data. The paper also presents stylized facts using our newly constructed FXI proxies.



Patterns of Foreign Exchange Intervention under Inflation Targeting

Author : Gustavo Adler

Publisher : International Monetary Fund

Page : 29 pages

File Size : 14,39 MB

Release : 2020-05-29

Category : Business & Economics

ISBN : 1513536451

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Book Description

The paper documents the use of foreign exchange intervention (FXI) across countries and monetary regimes, with special attention to its use under inflation targeting (IT). We find significant differences between advanced and emerging market economies, with the former group conducting FXI limitedly and broadly symmetrically, while the use of this policy instrument in emerging market countries is pervasive and mostly asymmetric (biased towards purchasing foreign currency, even after taking into account precautionary motives). Within emerging markets, the use of FXI is common both under IT and non-IT regimes. We find no evidence of FXI being used in response to inflation developments, while there is strong evidence that FXI responds to exchange rates, indicating that IT central banks in EMDEs have dual inflation/exchange rate objectives. We also find a higher propensity to overshoot inflation targets in emerging market economies where FXI is more pervasive.





Unveiling the Effects of Foreign Exchange Intervention

Author : Gustavo Adler

Publisher : International Monetary Fund

Page : 42 pages

File Size : 39,19 MB

Release : 2015-06-23

Category : Business & Economics

ISBN : 1513534602

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Book Description

We study the effect of foreign exchange intervention on the exchange rate relying on an instrumental-variables panel approach. We find robust evidence that intervention affects the level of the exchange rate in an economically meaningful way. A purchase of foreign currency of 1 percentage point of GDP causes a depreciation of the nominal and real exchange rates in the ranges of [1.7-2.0] percent and [1.4-1.7] percent respectively. The effects are found to be quite persistent. The paper also explores possible asymmetric effects, and whether effectiveness depends on the depth of domestic financial markets.



Strained Relations

Author : Michael D. Bordo

Publisher : University of Chicago Press

Page : 453 pages

File Size : 31,58 MB

Release : 2015-03-02

Category : Business & Economics

ISBN : 022605151X

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Book Description

During the twentieth century, foreign-exchange intervention was sometimes used in an attempt to solve the fundamental trilemma of international finance, which holds that countries cannot simultaneously pursue independent monetary policies, stabilize their exchange rates, and benefit from free cross-border financial flows. Drawing on a trove of previously confidential data, Strained Relations reveals the evolution of US policy regarding currency market intervention, and its interaction with monetary policy. The authors consider how foreign-exchange intervention was affected by changing economic and institutional circumstances—most notably the abandonment of the international gold standard—and how political and bureaucratic factors affected this aspect of public policy.



Unconventional Central Bank Measures for Emerging Economies

Author : Mr.Etienne B. Yehoue

Publisher : International Monetary Fund

Page : 44 pages

File Size : 26,75 MB

Release : 2009-10-01

Category : Business & Economics

ISBN : 1451873735

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Book Description

Unconventional central bank measures are playing a key policy role for many advanced economies in the 2007-09 global crisis. Are they playing a similar role for emerging economies? Emerging economies have widely used unconventional foreign exchange and domestic short-term liquidity easing measures. Their use of credit easing and quantitative easing measures has been much more limited. Thus, unconventional measures are much less important for emerging economies compared to advanced economies in achieving broader macroeconomic objectives. The difference can be attributed to the relatively limited financial stress in emerging economies, their external vulnerabilities and their limited scope for quasifiscal activities.



Monetary Policy Transmission in Emerging Markets and Developing Economies

Author : Mr.Luis Brandao-Marques

Publisher : International Monetary Fund

Page : 54 pages

File Size : 35,34 MB

Release : 2020-02-21

Category : Business & Economics

ISBN : 1513529730

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Book Description

Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT). However, questions regarding the strength of monetary policy transmission from interest rates to inflation and output have often stalled progress. We conduct a novel empirical analysis using Jordà’s (2005) approach for 40 EMDEs to shed a light on monetary transmission in these countries. We find that interest rate hikes reduce output growth and inflation, once we explicitly account for the behavior of the exchange rate. Having a modern monetary policy framework—adopting IT and independent and transparent central banks—matters more for monetary transmission than financial development.



The Central Bank Transparency Code

Author : International Monetary Fund. Monetary and Capital Markets Department

Publisher : INTERNATIONAL MONETARY FUND

Page : 132 pages

File Size : 23,38 MB

Release : 2020-07-30

Category : Business & Economics

ISBN : 9781513551814

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Book Description

The paper reports to the Executive Board on its decision of April 29, 2019, to prepare an IMF Central Bank Transparency Code (CBT), which is linked to the 2017 Review of the Standards and Codes Initiative (RSCI), for a revision and update of the 1999 Monetary and Financial Policies Transparency Code (MFPT). Directors asked that the CBT should remove the overlap on financial policies covered by other international standards, expand the transparency standards to broader set of activities undertaken by many central banks since the 2008 financial crisis, and reorient the transparency standards to facilitate risk-based assessments to support policy effectiveness and address macroeconomic risks.