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Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?

Olivier Blanchard (), Gustavo Adler and Irineu de Carvalho Filho ()

No WP15-18, Working Paper Series from Peterson Institute for International Economics

Abstract: Many emerging-market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. In this paper, we study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross-country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, we find that larger FXI leads to less exchange rate appreciation in response to gross inflows.

Keywords: foreign exchange intervention; exchange rate; capital flows; gross capital flows (search for similar items in EconPapers)
JEL-codes: E42 E58 F31 F40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
Date: 2015-11
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Working Paper: Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? (2015) Downloads
Working Paper: Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? (2015) Downloads
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