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Foreign Exchange Interventions and Intermediary Constraints

Author

Listed:
  • Ferreira, Alex

    (University of São Paulo)

  • Mullen, Rory

    (Warwick Business School)

  • Ricco, Giovanni

    (École Polytechnique, University of Warwick, OFCE & CEPR)

  • Viswanath-Natraj, Ganesh

    (Warwick Business School)

  • Wang, Zijie

    (Warwick Business School)

Abstract

We study the impact of foreign exchange interventions during periods of tight credit constraints. Expanding on the Gabaix and Maggiori (2015) model, we predict that long-lived spot interventions have larger effects on exchange rates than shortlived swaps, unanticipated interventions are more impactful, and tighter credit constraints amplify effects. Using high-frequency data on Brazilian Central Bank interventions from 1999 to 2023, we find that unanticipated spot sales of USD reserves lead to significant domestic currency appreciation and reduced covered interest parity deviations. Spot interventions outperform swaps, especially when global intermediaries are constrained, and enhance market efficiency by lowering USD borrowing costs.

Suggested Citation

  • Ferreira, Alex & Mullen, Rory & Ricco, Giovanni & Viswanath-Natraj, Ganesh & Wang, Zijie, 2024. "Foreign Exchange Interventions and Intermediary Constraints," The Warwick Economics Research Paper Series (TWERPS) 1522, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1522
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    References listed on IDEAS

    as
    1. 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).
    2. Lars E.O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994," NBER Working Papers 4871, National Bureau of Economic Research, Inc.
    3. 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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    More about this item

    Keywords

    Exchange Rate ; Central Bank ; Interventions ; Yield Curve ; Asset Pricing JEL Codes: E44 ; E58 ; F31 ; G14;
    All these keywords.

    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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