The microstructure of exchange rate management: FX intervention and capital controls in Brazil

Calebe de Roure, Steven Furnagiev and Stefan Reitz

Applied Economics, 2015, vol. 47, issue 34-35, 3617-3632

Abstract: This article uses a microstructure approach to analyse the effectiveness of capital controls introduced in Brazil to counter an appreciation of the Real. Based on a rich data set from the Brazilian foreign exchange market, we estimate a reduced-form VAR to characterize the interaction of the central bank, financial and commercial customers in times of regulatory policy measures. We find that capital controls change market participants' behaviour, and that central bank interventions elicit a significant response in financial order flow. Referring to the source of order flow, we find no direct price impact by financial flows and thus no evidence that the appreciation of the Real is driven by financial customers' activity. Instead, commercial customers seem to be a primary driver of the Real within our model.

Date: 2015
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Working Paper: The microstructure of exchange rate management: FX intervention and capital controls in Brazil (2013)
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DOI: 10.1080/00036846.2015.1021455

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