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Interventions in the Foreign Exchange Market: Effectiveness of Derivatives and Other Instruments

Author

Listed:
  • Walter Novaes

    (PUC/RJ)

  • Fernando N. de Oliveira

    (IBMEC Business School - Rio de Janeiro and Central Bank of Brazil)

Abstract

This paper discusses the effectiveness in Brazil of the traditional instruments of exchange rate interventions (spot interventions and interest rates) as well as instruments based on exchange rate derivatives (swaps and dollar indexed public bonds). We show that in periods of high volatility of the nominal exchange rate the instruments are not capable of significantly modifying the dynamics of the nominal exchange rate. In periods of low volatility of the nominal exchange rate, in contrast, both the traditional instruments and the derivative instruments are effective. These results are robust to the two techniques of estimation employed: GMM in continuous time and in discrete time.

Suggested Citation

  • Walter Novaes & Fernando N. de Oliveira, 2007. "Interventions in the Foreign Exchange Market: Effectiveness of Derivatives and Other Instruments," IBMEC RJ Economics Discussion Papers 2007-01, Economics Research Group, IBMEC Business School - Rio de Janeiro.
    • Handle: RePEc:ibr:dpaper:2007-01
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    File URL: http://professores.ibmecrj.br/erg/dp/papers/dp200701.pdf
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    More about this item

    Keywords

    Central Bank; intervention in the foreign exchange market; foreign exchange derivatives;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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