## Foreign Exchange Intervention in Latin American Countries with Inflation Targets

_IMF News, March 8, 2019_

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## Bibliographic details
- Published: March 8, 2019

---

### Overview
- Speech by David Lipton, IMF First Deputy Managing Director, delivered in Mexico City on March 8, 2019.
- Launches a new IMF book compiling experience on foreign exchange intervention in Latin America within inflation-targeting regimes.
- Motivation: heightened uncertainty in the global economy, including trade tensions and financial market volatility that sparked episodes of capital outflows from emerging market economies.

### An Integrated Policy Framework
- The book situates foreign exchange (FX) intervention within a broader toolkit that includes:
  - Monetary policy
  - Exchange rate policy
  - Macroprudential policy
  - Capital flow management policies
- Purpose: to think about complementarities and trade-offs across these tools in a more integrated way.
- Historical context: since the 1990s, most large Latin American economies transitioned to inflation targeting with flexible exchange rates, sometimes after crises that exposed the shortcomings of pegged regimes.

### FX Intervention in the Region — Practices and Objectives
- Motivations for reserves accumulation and intervention:
  - Building buffers against shocks
  - Counterbalancing sustained capital inflows following the commodity super-cycle and advanced-economy monetary stimulus after the global financial crisis
  - Countering depreciation pressures
- Modes of intervention observed:
  - Rules-based frameworks in some countries
  - Ad hoc, discretionary interventions in others
  - Direct spot market intervention to accommodate immediate FX liquidity needs
  - Derivative-based intervention where FX market pressures reflected hedging demand
- Contributions to the book:
  - Fund staff wrote introductory chapters
  - Experts from seven Latin American central banks contributed summaries of their countries’ intervention policies, goals, and outcomes

### Key Themes and Findings
- Benefits of rules-based intervention relative to discretionary intervention:
  - Example highlighted: Mexico has used mechanisms to:
    - Accumulate reserves
    - Reduce the pace of reserve accumulation through oil revenues
    - Address disorderly conditions in the foreign exchange market
- Importance of transparency and communications:
  - Strong communications policies reduce exchange rate volatility and market uncertainty
  - Transparency helps avoid undermining the credibility of the inflation target
  - Communications value applies beyond Latin America and parallels lessons from advanced economies’ unconventional monetary policies
- Value of institutional learning:
  - Compiling decision-making processes of central banks is instructive for cross-country learning and improving policy design

### Policy Implications and Recommendations (as emphasized in the speech)
- Treat FX intervention as part of an integrated policy framework, not as a standalone tool.
- Favor clear, rules-based intervention mechanisms where appropriate to enhance predictability and effectiveness.
- Strengthen transparency and communications to limit adverse effects on inflation-target credibility and to reduce market uncertainty.
- Use a mix of instruments (spot and derivatives) tailored to the nature of FX market pressures, including hedging-driven pressures.
- Encourage institutional collaboration and documentation of decision-making processes to improve collective understanding and policymaking.

### Conclusions
- The compiled experience in the book is a timely contribution to policy discussions amid global uncertainty.
- The region’s experience highlights both successful practices and areas where understanding remains limited, motivating further debate and research.
- The speaker expects today’s discussions to deepen understanding and help strengthen defenses against instability and disruption.

*Source: David Lipton, IMF First Deputy Managing Director; speech delivered Mexico City, March 8, 2019.*

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## References

- [David Lipton](http://www.imf.org/external/np/omd/bios/dl.htm)
- [Mexico and the IMF](http://www.imf.org/external/country/MEX/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2019/03/08/sp030819-foreign-exchange-intervention-in-latin-american-countries-with-inflation-targets_