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The Microstructure of Exchange Rate Management: FX Intervention and Capital Controls in Brazil

  • Calebe de Roure
  • Steven Furnagiev
  • Stefan Reitz

This 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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File URL: https://www.ifw-members.ifw-kiel.de/publications/the-microstructure-of-exchange-rate-management-fx-intervention-and-capital-controls-in-brazil-2/KWP_1865_2.pdf
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1865.

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Length: 27 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:kie:kieliw:1865
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  1. Michael J. Sager & Mark P. Taylor, 2006. "Under the microscope: the structure of the foreign exchange market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(1), pages 81-95.
  2. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
  3. Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Working Papers 2005-030, Federal Reserve Bank of St. Louis.
  4. Menkhoff, Lukas, 2012. "Foreign Exchange Intervention in Emerging Markets: A Survey of Empirical Studies," Hannover Economic Papers (HEP) dp-498, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  5. Lyons, Richard K., 1997. "A simultaneous trade model of the foreign exchange hot potato," Journal of International Economics, Elsevier, vol. 42(3-4), pages 275-298, May.
  6. Antonio Scalia, 2006. "Is foreign exchange intervention effective? Some micro-analytical evidence from the Czech Republic," Temi di discussione (Economic working papers) 579, Bank of Italy, Economic Research and International Relations Area.
  7. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
  8. Martin D.D. Evans & Richard K. Lyons, 1999. "Order Flow and Exchange Rate Dynamics," NBER Working Papers 7317, National Bureau of Economic Research, Inc.
  9. Emanuel Kohlscheen, 2012. "Order Flow and the Real: Indirect Evidence of the Effectiveness of Sterilized Interventions," Working Papers Series 273, Central Bank of Brazil, Research Department.
  10. G. Bird & R. Rajan, 2001. "Would International Currency Taxation and Currency Stabilisation in Developing Countries?," Journal of Development Studies, Taylor & Francis Journals, vol. 37(3), pages 21-38.
  11. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
  12. Michael Sager & Mark P. Taylor, 2008. "Commercially Available Order Flow Data and Exchange Rate Movements: "Caveat Emptor"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 583-625, 06.
  13. Marcos Chamon & Marcio Garcia, 2013. "Capital controls in Brazil: effective?," Textos para discussão 606, Department of Economics PUC-Rio (Brazil).
  14. 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.
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