Foreign Exchange Interventions and Foreign Shocks. The case of Uruguay

Elizabeth Bucacos (), Javier García-Cicco () and Miguel Mello ()
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Elizabeth Bucacos: Banco Central del Uruguay
Javier García-Cicco: Universidad de San Andrés (Argentina)
Miguel Mello: Banco Central del Uruguay
Authors registered in the RePEc Author Service: Javier Garcia Cicco

No 2023008, Documentos de trabajo from Banco Central del Uruguay

Abstract: We study the effects of exchange rate interventions in Uruguay on relevant macroeconomic variables such as the exchange rate, inflation, activity, and interest rates. Instead of attempting to identify exogenous variations in the intervention policy (a frequent strategy in the related literature, that raises many endogeneity concerns), we investigate the effect of interventions in dampening the impact of external shocks that are relevant determinants of exchange rate movements. This estimation is carried out through a novel econometric tool called constrained impulse response functions, which allows to construct counterfactual scenarios that are locally valid (i.e. marginal effects around average responses). Moreover, we exploit a detailed data on Central Bank’s operations in the exchange-rate market, leading to a clean measure of interventions that is not contaminated from other factors affecting the foreign reserves position (thus improving over most related studies). We find that interventions can help dampen exchange rate effects, and may have non-trivial effects on inflation as well, but generally the consequences in terms of activity are limited. Crucially, these effects depend on the type and sign of the external shock under consideration.

Keywords: Exchange rate intervention; flotation; currency; monetary policy; local projections (search for similar items in EconPapers)
JEL-codes: E58 F31 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2023
New Economics Papers: this item is included in nep-mon and nep-opm
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Related works:
Working Paper: Foreign Exchange Interventions and Foreign Shocks: The case of Uruguay (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bku:doctra:2023008

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