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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 in expectation, suggesting that FX intervention is used to stabilize the exchange rate in the face of temporary excessive movements rather than to manipulate it away from fundamental values. In line with this interpretation, we find that the scale of FX intervention responds to the degree of exchange rate misalignment relative to UIP conditions. We also document that intervention is more aggressive when there is less uncertainty about the medium-term level of the exchange rate and when the exchange rate is overvalued rather than undervalued.

Suggested Citation

  • Sandri, Damiano, 2020. "FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability," CEPR Discussion Papers 14897, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14897
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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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