Leaning-against-the-wind Intervention and the “carry-trade” View of the Cost of Reserves

Eduardo Levy Yeyati and Juan Francisco Gómez

No 419, CID Working Papers from Center for International Development at Harvard University

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: 2022-10
New Economics Papers: this item is included in nep-ban, nep-mon and nep-opm
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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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