Macroeconomic Impact of Foreign Exchange Intervention: Some Cross-country Empirical Findings

Author/Editor:

Zhongxia Jin ; Haobin Wang ; Yue Zhao

Publication Date:

April 30, 2021

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Based on VAR analyses across 26 countries, we show that, although foreign exchange intervention (FXI) is effective in stabilizing the nominal exchange rate in the short run, its impacts on the real exchange rate are less significant: Limitations on nominal exchange rate flexibility may induce adjustments to the real exchange rate through domestic prices. We find that countries that intervene more heavily in response to external shocks experience greater general and asset price volatility, which is not conducive to countering the impact of external shocks. We show that China’s macroeconomic responses to external shocks are broadly consistent with international experiences among intervening countries. The simple methodological framework adopted in this paper is meant to examine a broad set of macroeconomic variables and bears limitations; our findings serve to motivate more structural analysis on FXI’s macroeconomic impacts going forward.

Series:

Working Paper No. 2021/126

Frequency:

regular

English

Publication Date:

April 30, 2021

ISBN/ISSN:

9781513571959/1018-5941

Stock No:

WPIEA2021126

Pages:

28

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