Brazilian Strategy for Managing the Risk of Foreign Exchange Rate Exposure During a Crisis

Antonio Jr.
Authors registered in the RePEc Author Service: Antonio Francisco Almeida Silva Junior

No 207, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: Even in a floating foreign exchange rate regime, monetary authorities sometimes intervene in the currency market due to liquidity demand and foreign exchange crises. Typically, central banks intervene using foreign currency trades and/or by changing domestic interest rates. We discuss this framework in the context of an optimal impulse stochastic control model. The control and performance equations include interventions with swap operations in the domestic market, since the Central Bank of Brazil also uses these operations. We evaluate risk management strategies for central bank interventions in case of crisis based on the model. We conclude that the Brazilian risk management strategy of increasing holdings of international reserves and decreasing short foreign exchange rate exposure in domestic public debt after 2004 gave the country more flexibility to manage foreign exchange rate risk in 2008 and to avoid higher interest rates to attract international capital as was necessary in previous crises.

Date: 2010-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ifn, nep-mon and nep-rmg
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Citations: View citations in EconPapers (1)

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