Leaning-against-the-wind Intervention and the “Carry-Trade” View of the Cost of Reserves

Eduardo Levy Yeyati and Juna Francisco Gómez
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Juna Francisco Gómez: Universidad de Buenos Aires

No 163, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

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; selfinsurance (search for similar items in EconPapers)
Pages: 32 pages
Date: 2022-07
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
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https://rednie.eco.unc.edu.ar/files/DT/163.pdf (application/pdf)

Related works:
Journal Article: 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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