Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?
IMF Working Papers, July 16, 2015
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- Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?
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Bibliographic details
- Authors: Olivier J Blanchard, Gustavo Adler, Irineu E de Carvalho Filho
- Published: July 16, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513585840.001
Summary and main finding
- Many emerging market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows.
- The paper studies whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate.
- To deal with endogeneity issues, the authors examine the response of different countries to plausibly exogenous gross inflows and explore cross-country variation of FXI and exchange rate responses.
- Consistent with the portfolio balance channel, the study finds that larger FXI leads to less exchange rate appreciation in response to gross inflows.
Methodology and identification
- Strategy: analyze responses to plausibly exogenous gross inflows and exploit cross-country variation in FXI and exchange rate responses to address endogeneity.
- Emphasis on isolating the effect of FXI on exchange rate movements conditional on gross capital flow shocks.
Substantive findings and interpretation
- Primary empirical result: larger foreign exchange intervention is associated with reduced exchange rate appreciation following gross capital inflows.
- The result is framed as consistent with the portfolio balance channel.
Policy implications (as implied by findings)
- FXI can be an effective policy tool for emerging market economies to attenuate exchange rate appreciation pressures arising from gross capital inflows, consistent with portfolio balance considerations.
Subjects and keywords
- 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
Source: Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?, IMF Working Papers, July 16, 2015.
Content in this bundle
- _wp15159 - Section IV concludes.