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

ByOlivier J Blanchard, Gustavo Adler, Irineu E de Carvalho Filho

July 16, 2015

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Balance of payments, Capital controls, Capital flows, Capital inflows, Exchange rate arrangements, Exchange rates, Foreign exchange, Foreign exchange intervention

Keywords: Capital controls, capital flows, Capital inflows, exchange rate, exchange rate appreciation, Exchange rate arrangements, exchange rate response, Exchange rates, flow shock, foreign exchange intervention, FXI conditional, FXI response, Global, gross capital flows, impulse response, interest rate, reaction function, regime classification, sample use FXI, standard deviation, WP

Pages:
30
Volume:
2015
DOI:
https://doi.org/10.5089/9781513585840.001
Issue:
159
Series:
Working Paper No. 2015/159
Stock No:
WPIEA2015159
ISBN:
9781513585840
ISSN:
1018-5941

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