The Cost of Foreign Exchange Intervention: Concepts and Measurement

April 8, 2016

Preview Citation

Format: Chicago

Gustavo Adler, and Rui Mano. The Cost of Foreign Exchange Intervention: Concepts and Measurement, (USA: International Monetary Fund, 2016) accessed September 18, 2024

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

The accumulation of large foreign asset positions by many central banks through sustained foreign exchange (FX) intervention has raised questions about its associated fiscal costs. This paper clarifies conceptual issues regarding how to measure these costs both from an ex-post and an ex-ante (relevant for decision making) perspective, and estimates both marginal and total costs for 73 countries over the period 2002-13. We find ex-ante marginal costs for the median emerging market economy (EME) in the inter-quartile range of 2-5.5 percent per year; while ex-ante total costs (of sustaining FX positions) in the range of 0.2-0.7 percent of GDP per year for light interveners and 0.3-1.2 percent of GDP per year for heavy interveners. These estimates indicate that fiscal costs of sustained FX intervention (via expanding central bank balance sheets) are not negligible.

Subject: Currencies, Exchange rate adjustments, Exchange rates, Financial services, Foreign exchange, Interest rate parity, Money

Keywords: Central bank balance sheet, Cost of FXI, Currencies, Currency risk premium, Exchange rate, Exchange rate adjustments, Exchange rates, Foreign exchange intervention, FX intervention, FX position, Global, Incurred cost, Interest rate parity, International reserves, Post cost, Risk premia, Risk premium, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/089
Stock No:

WPIEA2016089
ISBN:

9781484323076
ISSN:

1018-5941

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