Foreign Exchange Interventions and Intermediary Constraints

Alex Ferreira, Rory Mullen, Giovanni Ricco (), Ganesh Viswanath-Natraj and Zijie Wang
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Alex Ferreira: University of São Paulo
Rory Mullen: Warwick Business School
Ganesh Viswanath-Natraj: Warwick Business School
Zijie Wang: Warwick Business School

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

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.

Keywords: Exchange Rate; Central Bank; Interventions; Yield Curve; Asset Pricing JEL Codes: E44; E58; F31; G14 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1522

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