Leaning-Against-the-Wind Intervention and the “Carry-Trade” View of the Cost of Reserves

Eduardo Levy-Yeyati () and Juan Francisco Gómez ()
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Eduardo Levy-Yeyati: School of Government at Universidad Torcuato Di Tella
Juan Francisco Gómez: Department of Economics at Universidad de Buenos Aires
Authors registered in the RePEc Author Service: Eduardo Levy Yeyati

Open Economies Review, 2022, vol. 33, issue 5, No 4, 853-877

Abstract: Abstract For a sample of emerging economies, we estimate the quasi-fiscal costs of sterilized foreign exchange interventions as the P&L of an inverse carry trade. We show that these costs can be substantial when intervention has a neo-mercantilist motive (preserving an undervalued currency) or a stabilization motive (appreciating the exchange rate as a nominal anchor) but are rather small when interventions follow a countercyclical, leaning-against-the-wind (LAW) pattern to contain exchange rate volatility. We document that under LAW, central banks outperform a constant size carry trade, as they additionally benefit from buying against cyclical deviations, and that the cost of reserves under the carry-trade view is generally lower than the one obtained from the credit-risk view (which equals the marginal cost to the country´s sovereign spread).

Keywords: Exchange rates; Foreign exchange intervention; International reserves; Self-insurance (search for similar items in EconPapers)
Date: 2022
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Working Paper: Leaning-against-the-wind Intervention and the “Carry-Trade” View of the Cost of Reserves (2022)
Working Paper: Leaning-against-the-wind Intervention and the “carry-trade” View of the Cost of Reserves (2022)
Working Paper: Leaning-against-the-wind Intervention and the “carry-trade” View of the Cost of Reserves (2022)
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DOI: 10.1007/s11079-022-09689-z

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