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From Lombard Street to Avenida Paulista

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Author Info

  • Mark R. Stone
  • W. Christopher Walker
  • Yosuke Yasui
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    Abstract

    The provision of foreign exchange liquidity by emerging market central banks during the global shock of 2008-09 departs from the domestic liquidity lender of last resort role described by Bagehot in his classic "Lombard Street." This paper documents and analyzes the foreign exchange liquidity providing measures of the Banco Central do Brasil (BCB) in response to varied market stresses. These measures appear to have reduced the relative onshore cost of dollar liquidity on impact and seemed to stabilize market expectations of exchange rate volatility. The results suggest that foreign exchange liquidity easing operations may become a standard central bank tool.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/259.

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    Length: 35
    Date of creation: 01 Nov 2009
    Date of revision:
    Handle: RePEc:imf:imfwpa:09/259

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    Related research

    Keywords: Central bank policy; Domestic liquidity; Emerging markets; Foreign exchange operations; Global Financial Crisis 2008-2009; Liquidity management; foreign exchange; foreign exchange liquidity; exchange rate; foreign exchange market; spot exchange rate; foreign currency; exchange rate volatility; foreign exchange intervention; exchange operations; exchange market intervention; exchange rate intervention; exchange swaps; forward exchange; foreign exchange swaps; forward exchange rate; foreign exchange interventions; credit markets; exchange rate level; currency swaps; international settlements; exchange rates; exchange market instability; exchange rate instability; foreign capital; currency transactions; exchange shortages; exchange rate exposure; exchange rate policy; currency depreciation; exchange rate stability; forward exchange rates; dollar exchange rate; currency risk; foreign exchange shortages; currency fluctuation; flexible exchange rates; foreign exchange auctions; foreign exchange contracts;

    This paper has been announced in the following NEP Reports:

    References

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    1. Guillermo A. Calvo, 2006. "Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort," NBER Working Papers 12788, National Bureau of Economic Research, Inc.
    2. John Taylor & John Williams, 2008. "Further Results on a Black Swan in the Money Market," Discussion Papers 07-046, Stanford Institute for Economic Policy Research.
    3. Cho-Hoi Hui & Hans Genberg & Tsz-Kin Chung, 2009. "Funding Liquidity Risk and Deviations from Interest-Rate Parity During the Financial Crisis of 2007-2009," Working Papers 0913, Hong Kong Monetary Authority.
    4. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking and the international policy response," BIS Working Papers 291, Bank for International Settlements.
    5. Fernando N. de Oliveira & Walter Novaes, 2005. "The Market of Foreign Exchange Hedge in Brazil: Reactions of Financial Institutions to Interventions of the Central Bank," IBMEC RJ Economics Discussion Papers 2005-13, Economics Research Group, IBMEC Business School - Rio de Janeiro.
    6. Disyatat, Piti & Galati, Gabriele, 2007. "The effectiveness of foreign exchange intervention in emerging market countries: Evidence from the Czech koruna," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 383-402, April.
    7. corrinne ho & robert n mccauley, 2004. "Living with flexible exchange rates:," International Finance 0411003, EconWPA.
    8. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February.
    9. Matías Tapia & Andrea Tokman, 2004. "Effects of Foreign Exchange Intervention under Public Information: The Chilean Case," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
    10. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
    11. Sandro Canesso de Andrade & Benjamin Miranda Tabak, 2001. "Is it Worth Tracking Dollar/Real Implied Volatility?," Working Papers Series 15, Central Bank of Brazil, Research Department.
    12. Seth Carpenter & Selva Demiralp, 2004. "The liquidity effect in the federal funds market: evidence from daily open market operations," Finance and Economics Discussion Series 2004-61, Board of Governors of the Federal Reserve System (U.S.).
    13. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
    14. Mark R. Stone & Etienne B. Yehoue & Kotaro Ishi, 2009. "Unconventional Central Bank Measures for Emerging Economies," IMF Working Papers 09/226, International Monetary Fund.
    15. Anna Nordstrom & Scott Roger & Mark R. Stone & Seiichi Shimizu & Turgut Kisinbay & Jorge Restrepo, 2009. "The Role of the Exchange Rate in Inflation," IMF Occasional Papers 267, International Monetary Fund.
    16. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2009. "Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008," NBER Working Papers 14826, National Bureau of Economic Research, Inc.
    17. Bagehot, Walter, 1873. "Lombard Street: A Description of the Money Market," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number bagehot1873.
    18. Rogers, J. M. & Siklos, P. L., 2003. "Foreign exchange market intervention in two small open economies: the Canadian and Australian experience," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 393-416, June.
    19. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
    20. Frederico Pechir Gomes & Marcelo Yoshio Takami & Vinicius Ratton Brandi, 2008. "Foreign Exchange Market Volatility Information: An Investigation of Real-Dollar Exchange Rate," Working Papers Series 174, Central Bank of Brazil, Research Department.
    21. Ilker Domac & Alfonso Mendoza, 2002. "Is there Room for Forex Interventions under Inflation Targeting Framework? Evidence from Mexico and Turkey," Discussion Papers 0206, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
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    Citations

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    Cited by:
    1. Etienne B. Yehoue, 2009. "Emerging Economy Responses to the Global Financial Crisis of 2007-20+L427209," IMF Working Papers 09/265, International Monetary Fund.
    2. Mark R. Stone & Etienne B. Yehoue & Kotaro Ishi, 2009. "Unconventional Central Bank Measures for Emerging Economies," IMF Working Papers 09/226, International Monetary Fund.
    3. Barbedo, Claudio H.S. & de Melo, Eduardo F.L., 2012. "Joint dynamics of Brazilian interest rate yields and macro variables under a no-arbitrage restriction," Journal of Economics and Business, Elsevier, vol. 64(5), pages 364-376.

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