The Microstructure of Exchange Rate Management: FX Intervention and Capital Controls in Brazil
AbstractThis paper uses a microstructure approach to analyze the effectiveness of capital controls introduced in Brazil to counter an appreciation of the Real. Based on a rich data set from the Brazilian foreign exchange market, we estimate a reduced-form VAR to characterize the interaction of the central bank, financial and commercial customers in times of regulatory policy measures. Controlling for regular FX interventions we find that capital controls change market participants' behavior. Referring to thesource of order flow, we find no evidence that the appreciation of the Real is driven by financial customers’ activity. Instead, commercial customers seem to be a primary driver of the Real within our model. To the extent that capital controls influence commercial customers' order flow, this is the likely channel policy makers use to respond to a perceived loss of international competitiveness
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1865.
Length: 27 pages
Date of creation: Aug 2013
Date of revision:
Foreign Exchange; Sterilized Intervention; Macroprudential Policies; Market Microstructure;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-31 (All new papers)
- NEP-CBA-2013-08-31 (Central Banking)
- NEP-IFN-2013-08-31 (International Finance)
- NEP-LAM-2013-08-31 (Central & South America)
- NEP-MON-2013-08-31 (Monetary Economics)
- NEP-MST-2013-08-31 (Market Microstructure)
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