The Cost of Foreign Exchange Intervention: Concepts and Measurement
IMF Working Papers, April 8, 2016
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Bibliographic details
- Authors: Gustavo Adler, Rui Mano
- Published: April 8, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484323076.001
Overview
- Objective: Clarify conceptual issues for measuring fiscal costs of sustained foreign exchange (FX) intervention from both ex-post and ex-ante perspectives, and estimate marginal and total costs.
- Sample and period: 73 countries over the period 2002-13.
- Format: IMF Working Paper No. 2016/089, 37 pages.
Key empirical findings
- Ex-ante marginal costs for the median emerging market economy (EME) in the inter-quartile range: 2-5.5 percent per year.
- Ex-ante total costs (of sustaining FX positions):
- Light interveners: 0.2-0.7 percent of GDP per year.
- Heavy interveners: 0.3-1.2 percent of GDP per year.
- Main conclusion: These estimates indicate that fiscal costs of sustained FX intervention (via expanding central bank balance sheets) are not negligible.
Methodology and scope
- Conceptual focus: Distinguish measurement approaches relevant for ex-post assessment and ex-ante decision making.
- Empirical approach: Estimates of both marginal and total costs across a cross-country sample of 73 countries for 2002-13.
- Subject coverage: Currencies, Exchange rate adjustments, Exchange rates, Financial services, Foreign exchange, Interest rate parity, Money.
- Keywords emphasized in analysis: central bank balance sheet, cost of FXI, currency risk premium, exchange rate, foreign exchange intervention, FX intervention, FX position, Global, incurred cost, Interest rate parity, international reserves, post cost, risk premia, risk premium, WP.
Policy implications and interpretation
- Fiscal relevance: Sustained FX intervention that expands central bank balance sheets can produce non-negligible fiscal costs as evidenced by the estimated marginal and total cost ranges.
- Decision-making perspective: Ex-ante cost estimates (marginal and total) are presented to inform policy choices regarding the scale and persistence of FX intervention.
Source: The Cost of Foreign Exchange Intervention: Concepts and Measurement, Gustavo Adler and Rui Mano, April 8, 2016.