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Foreign Exchange Interventions and Intermediary Constraints

Author

Listed:
  • Alex Ferreira

    (University of São Paulo)

  • Rory Mullen

    (WBS - Warwick Business School - University of Warwick [Coventry])

  • Giovanni Ricco

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - GENES - Groupe des Écoles Nationales d'Économie et Statistique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - GENES - Groupe des Écoles Nationales d'Économie et Statistique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique - IP Paris - Institut Polytechnique de Paris, University of Warwick [Coventry], OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Ganesh Viswanath-Natraj

    (WBS - Warwick Business School - University of Warwick [Coventry])

  • Zijie Wang

    (WBS - Warwick Business School - University of Warwick [Coventry])

Abstract

The dollar intermediation channel of foreign exchange interventions, a form of the portfolio balance channel, emerges from the imperfect substitutability between domestic currency and USD, the dominant global currency, and financial frictions limiting USD liquidity access. This channel plays a key role in the Banco Central do Brasil's FX interventions. Using high-frequency data on 8,000+ Brazilian FXI events (1999-2023), we find that unanticipated spot sales appreciate the domestic currency, reduce covered interest parity deviations, and crowd out private intermediation, especially when intermediaries are constrained. Our results support an extended Gabaix and Maggiori (2015) model, where constrained intermediaries amplify intervention effectiveness.

Suggested Citation

  • Alex Ferreira & Rory Mullen & Giovanni Ricco & Ganesh Viswanath-Natraj & Zijie Wang, 2025. "Foreign Exchange Interventions and Intermediary Constraints," SciencePo Working papers Main hal-05008812, HAL.
    • Handle: RePEc:hal:spmain:hal-05008812
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-05008812v1
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    References listed on IDEAS

    as
    1. Jeanne, Olivier & Sandri, Damiano, 2020. "Optimal reserves in financially closed economies," Journal of International Money and Finance, Elsevier, vol. 104(C).
    2. Arango-Lozano, Lucía & Menkhoff, Lukas & Rodríguez-Novoa, Daniela & Villamizar-Villegas, Mauricio, 2024. "The effectiveness of FX interventions: A meta-analysis," Journal of Financial Stability, Elsevier, vol. 74(C).
    3. Svensson, L.E.O., 1994. "Estimating and Interpreting Foreward Interest Rates: Sweden 1992-1994," Papers 579, Stockholm - International Economic Studies.
    4. Arango-Lozano, Lucía & Menkhoff, Lukas & Rodríguez-Novoa, Daniela & Villamizar-Villegas, Mauricio, 2024. "The effectiveness of FX interventions: A meta-analysis," Journal of Financial Stability, Elsevier, vol. 74(C).
    5. Vitale, Paolo, 2006. "A Critical Appraisal of Recent Developments in the Analysis of Foreign Exchange Intervention," CEPR Discussion Papers 5729, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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