Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?

Author/Editor:

Olivier J Blanchard ; Gustavo Adler ; Irineu E de Carvalho Filho

Publication Date:

July 16, 2015

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Many emerging market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. In this paper, we study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, we find that larger FXI leads to less exchange rate appreciation in response to gross inflows.

Series:

Working Paper No. 2015/159

Subject:

Balance of payments Capital controls Capital flows Capital inflows Exchange rate arrangements Exchange rates Foreign exchange Foreign exchange intervention

English

Publication Date:

July 16, 2015

ISBN/ISSN:

9781513585840/1018-5941

Stock No:

WPIEA2015159

Pages:

30

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