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The microstructure of exchange rate management: FX intervention and capital controls in Brazil

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  • Calebe de Roure
  • Steven Furnagiev
  • Stefan Reitz

Abstract

This article uses a microstructure approach to analyse 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. We find that capital controls change market participants' behaviour, and that central bank interventions elicit a significant response in financial order flow. Referring to the source of order flow, we find no direct price impact by financial flows and thus 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.

Suggested Citation

  • Calebe de Roure & Steven Furnagiev & Stefan Reitz, 2015. "The microstructure of exchange rate management: FX intervention and capital controls in Brazil," Applied Economics, Taylor & Francis Journals, vol. 47(34-35), pages 3617-3632, July.
  • Handle: RePEc:taf:applec:v:47:y:2015:i:34-35:p:3617-3632
    DOI: 10.1080/00036846.2015.1021455
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    Cited by:

    1. Smita Roy Trivedi, 2020. "The Moses effect: can central banks really guide foreign exchange markets?," Empirical Economics, Springer, vol. 58(6), pages 2837-2865, June.
    2. Broos, Menno & Ghalanos, Michalis & Kennedy, Bernard & Landbeck, Alexander & Lerner, Christina & Menezes, Paula & Schiavone, Alessandro & Tilley, Thomas & Viani, Francesca & Reinhardt, Dennis & Metzem, 2016. "Dealing with large and volatile capital flows and the role of the IMF," Occasional Paper Series 180, European Central Bank.
    3. Aguirre, Pablo & Alonso, José Antonio & Jerez, Miguel, 2019. "Effectiveness of capital account regulation: Lessons from Brazil and Peru," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 176-194.

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    More about this item

    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

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