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FX intervention to stabilize or manipulate the exchange rate? Inference from profitability

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  • Sandri, Damiano

Abstract

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 from an ex-ante perspective, suggesting that FX intervention is used to stabilize the exchange rate against temporary excessive fluctuations relative to UIP conditions. Consistent with this interpretation, we document that the direction and size of FX intervention responds to UIP deviations. We also find that FX intervention responds more aggressively to UIP deviations when there is less uncertainty about the future level of the exchange rate and when the exchange rate is overvalued.

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  • Sandri, Damiano, 2023. "FX intervention to stabilize or manipulate the exchange rate? Inference from profitability," Journal of International Money and Finance, Elsevier, vol. 131(C).
    • Handle: RePEc:eee:jimfin:v:131:y:2023:i:c:s0261560622001899
    DOI: 10.1016/j.jimonfin.2022.102786
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    More about this item

    Keywords

    FX intervention; profitability; exchange rate;
    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

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