Foreign exchange intervention and capital flow measures under external tail risks

Nicolas Magud and Samuel Pienknagura

Emerging Markets Review, 2025, vol. 65, issue C

Abstract: We study extreme movements in the distribution of the real effective exchange rate (REER). Global uncertainty and financial conditions shocks have a strong impact on the tails of the REER distribution, especially in economies with shallower FX markets, lower central bank credibility, and higher credit risk. FX intervention (FXI) partially offsets the impact of these shocks in the left tail (large depreciations), particularly in economies with weaker fundamentals and, importantly, where FXI is used sporadically. While capital flow management policies have low effectiveness in preventing large REER movements, they enhance FXI's effectiveness by throwing sand in wheels of FX transactions.

Keywords: Real exchange rates; External shocks; Foreign exchange intervention; Capital controls (search for similar items in EconPapers)
JEL-codes: F31 F38 F41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:65:y:2025:i:c:s1566014124001407

DOI: 10.1016/j.ememar.2024.101245

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