## Exchange-Rate Swings and Foreign Currency Intervention

_IMF Working Papers, July 29, 2022_

## Source details

**Canonical URL:** [Exchange-Rate Swings and Foreign Currency Intervention](https://www.imf.org/en/publications/wp/issues/2022/07/28/exchange-rate-swings-and-foreign-currency-intervention-521039)

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## Bibliographic details
- Authors: Andrew Filardo, Thomas McGregor
- Published: July 29, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400215322.001

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### Research objective and approach
- Develops a new approach for exploring the effectiveness of foreign currency intervention, focusing on real exchange cycles.
- Uses band spectrum regression methods to examine the role of macroeconomic fundamentals in determining the equilibrium real exchange rate at short-, medium-, and low frequencies.
- Assesses the effectiveness of FX intervention depending on the degree of cycle-specific misalignments for 26 advanced- and emerging market economies, covering the period 1990–2018, and uses different techniques to mitigate endogeneity concerns.

### Key findings
- Evidence supports the hypothesis that central banks can lean effectively against short-run cyclical misalignments of the real exchange rate.
- The effects are present in quarterly data—i.e., at policy-relevant horizons.
- The effectiveness of intervention rises with the size of the misalignment.
- Effectiveness also rises with the duration of one-sided interventions.
- FX sales appear to be somewhat more effective than FX purchases.
- Intervention is less effective in more liquid FX markets.

### Methodological notes
- Core estimation technique: band spectrum regression methods to separate short-, medium-, and low-frequency components of real exchange rates and fundamentals.
- Sample: 26 advanced- and emerging market economies.
- Sample period: 1990–2018.
- Data frequency: quarterly.

### Policy-relevant implications
- Central banks can influence short-run cyclical real exchange rate misalignments through FX intervention at horizons relevant for policy (quarterly).
- Greater impact is expected when interventions are:
  - Larger in size (effectiveness rises with the size of the misalignment).
  - Sustained and one-sided in duration.
- Consideration should be given to market liquidity conditions, as higher FX market liquidity is associated with reduced intervention effectiveness.
- Net FX sales may be prioritized over FX purchases when policy aims to lean against appreciation pressures, given the evidence of somewhat greater effectiveness.

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_Source: https://www.imf.org/en/publications/wp/issues/2022/07/28/exchange-rate-swings-and-foreign-currency-intervention-521039_