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

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

Author: Mr.Olivier J. Blanchard

Publisher: International Monetary Fund

Published: 2015-07-16

Total Pages: 30

ISBN-13: 1513585843

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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.


Book Synopsis Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? by : Mr.Olivier J. Blanchard

Download or read book Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? written by Mr.Olivier J. Blanchard and published by International Monetary Fund. This book was released on 2015-07-16 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

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

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

Author: Olivier J. Blanchard

Publisher:

Published: 2018

Total Pages: 30

ISBN-13:

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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.


Book Synopsis Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? by : Olivier J. Blanchard

Download or read book Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? written by Olivier J. Blanchard and published by . This book was released on 2018 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

External Shocks, Policies, and Tail-Shifts in Real Exchange Rates

External Shocks, Policies, and Tail-Shifts in Real Exchange Rates

Author: Mr. Nicolas E Magud

Publisher: International Monetary Fund

Published: 2023-06-23

Total Pages: 51

ISBN-13:

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We use panel quantile regressions to study extreme (rather than average) movements in the distribution of the real effective exchange rate (REER) of small open economies. We document that global uncertainty (VIX) and global financial conditions (U.S. monetary policy) shocks have a strong impact on the distribution of the REER changes, with larger impacts in the tails of the distribution, and especially in economies with shallower FX markets, lower central bank credibility, and higher credit risk (i.e., weaker macro fundamentals). Foreign exchange intervention (FXI) partially offsets the impact of these shocks, especially in the left tail (large depreciations) and particularly in economies with weaker fundamentals but, more importantly, when FXI is used sporadically. Thus, our results highlight the importance of deepening FX markets, improving central bank credibility, and strengthening macro fundamentals against the potential dynamic trade-offs of overreliance on a policy that would exacerbate the previously mentioned frictions. While our results point to low effectiveness of capital flow management in preventing large REER movements, they seem to enable more impactful foreign exchange intervention in the immediate aftermath of shocks.


Book Synopsis External Shocks, Policies, and Tail-Shifts in Real Exchange Rates by : Mr. Nicolas E Magud

Download or read book External Shocks, Policies, and Tail-Shifts in Real Exchange Rates written by Mr. Nicolas E Magud and published by International Monetary Fund. This book was released on 2023-06-23 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: We use panel quantile regressions to study extreme (rather than average) movements in the distribution of the real effective exchange rate (REER) of small open economies. We document that global uncertainty (VIX) and global financial conditions (U.S. monetary policy) shocks have a strong impact on the distribution of the REER changes, with larger impacts in the tails of the distribution, and especially in economies with shallower FX markets, lower central bank credibility, and higher credit risk (i.e., weaker macro fundamentals). Foreign exchange intervention (FXI) partially offsets the impact of these shocks, especially in the left tail (large depreciations) and particularly in economies with weaker fundamentals but, more importantly, when FXI is used sporadically. Thus, our results highlight the importance of deepening FX markets, improving central bank credibility, and strengthening macro fundamentals against the potential dynamic trade-offs of overreliance on a policy that would exacerbate the previously mentioned frictions. While our results point to low effectiveness of capital flow management in preventing large REER movements, they seem to enable more impactful foreign exchange intervention in the immediate aftermath of shocks.

SHOCKS AND CAPITAL FLOWS

SHOCKS AND CAPITAL FLOWS

Author: GASTON. SAHAY GELOS (RATNA.)

Publisher: International Monetary Fund

Published: 2023

Total Pages: 2040

ISBN-13:

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Book Synopsis SHOCKS AND CAPITAL FLOWS by : GASTON. SAHAY GELOS (RATNA.)

Download or read book SHOCKS AND CAPITAL FLOWS written by GASTON. SAHAY GELOS (RATNA.) and published by International Monetary Fund. This book was released on 2023 with total page 2040 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Preemptive Policies and Risk-Off Shocks in Emerging Markets

Preemptive Policies and Risk-Off Shocks in Emerging Markets

Author: Ms. Mitali Das

Publisher: International Monetary Fund

Published: 2022-01-07

Total Pages: 54

ISBN-13: 1616358343

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We show that “preemptive” capital flow management measures (CFM) can reduce emerging markets and developing countries’ (EMDE) external finance premia during risk-off shocks, especially for vulnerable countries. Using a panel dataset of 56 EMDEs during 1996–2020 at monthly frequency, we document that countries with preemptive policies in place during the five year window before risk-off shocks experienced relatively lower external finance premia and exchange rate volatility during the shock compared to countries which did not have such preemptive policies in place. We use the episodes of Taper Tantrum and COVID-19 as risk-off shocks. Our identification relies on a difference-in-differences methodology with country fixed effects where preemptive policies are ex-ante by construction and cannot be put in place as a response to the shock ex-post. We control the effects of other policies, such as monetary policy, foreign exchange interventions (FXI), easing of inflow CFMs and tightening of outflow CFMs that are used in response to the risk-off shocks. By reducing the impact of risk-off shocks on countries’ funding costs and exchange rate volatility, preemptive policies enable countries’ continued access to international capital markets during troubled times.


Book Synopsis Preemptive Policies and Risk-Off Shocks in Emerging Markets by : Ms. Mitali Das

Download or read book Preemptive Policies and Risk-Off Shocks in Emerging Markets written by Ms. Mitali Das and published by International Monetary Fund. This book was released on 2022-01-07 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: We show that “preemptive” capital flow management measures (CFM) can reduce emerging markets and developing countries’ (EMDE) external finance premia during risk-off shocks, especially for vulnerable countries. Using a panel dataset of 56 EMDEs during 1996–2020 at monthly frequency, we document that countries with preemptive policies in place during the five year window before risk-off shocks experienced relatively lower external finance premia and exchange rate volatility during the shock compared to countries which did not have such preemptive policies in place. We use the episodes of Taper Tantrum and COVID-19 as risk-off shocks. Our identification relies on a difference-in-differences methodology with country fixed effects where preemptive policies are ex-ante by construction and cannot be put in place as a response to the shock ex-post. We control the effects of other policies, such as monetary policy, foreign exchange interventions (FXI), easing of inflow CFMs and tightening of outflow CFMs that are used in response to the risk-off shocks. By reducing the impact of risk-off shocks on countries’ funding costs and exchange rate volatility, preemptive policies enable countries’ continued access to international capital markets during troubled times.

International Capital Flow Pressures

International Capital Flow Pressures

Author: Ms.Linda S. Goldberg

Publisher: International Monetary Fund

Published: 2018-02-16

Total Pages: 58

ISBN-13: 1484341805

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This paper presents a new measure of capital flow pressures in the form of a recast Exchange Market Pressure index. The measure captures pressures that materialize in actual international capital flows as well as pressures that result in exchange rate adjustments. The formulation is theory-based, relying on balance of payments equilibrium conditions and international asset portfolio considerations. Based on the modified exchange market pressure index, the paper also proposes the Global Risk Response Index, which reflects the country-specific sensitivity of capital flow pressures to measures of global risk aversion. For a large sample of countries over time, we demonstrate time variation in the effects of global risk on exchange market pressures, the evolving importance of the global factor across types of countries, and the changing risk-on or risk-off status of currencies.


Book Synopsis International Capital Flow Pressures by : Ms.Linda S. Goldberg

Download or read book International Capital Flow Pressures written by Ms.Linda S. Goldberg and published by International Monetary Fund. This book was released on 2018-02-16 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a new measure of capital flow pressures in the form of a recast Exchange Market Pressure index. The measure captures pressures that materialize in actual international capital flows as well as pressures that result in exchange rate adjustments. The formulation is theory-based, relying on balance of payments equilibrium conditions and international asset portfolio considerations. Based on the modified exchange market pressure index, the paper also proposes the Global Risk Response Index, which reflects the country-specific sensitivity of capital flow pressures to measures of global risk aversion. For a large sample of countries over time, we demonstrate time variation in the effects of global risk on exchange market pressures, the evolving importance of the global factor across types of countries, and the changing risk-on or risk-off status of currencies.

Unveiling the Effects of Foreign Exchange Intervention

Unveiling the Effects of Foreign Exchange Intervention

Author: Gustavo Adler

Publisher: International Monetary Fund

Published: 2015-06-23

Total Pages: 42

ISBN-13: 1513534602

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We study the effect of foreign exchange intervention on the exchange rate relying on an instrumental-variables panel approach. We find robust evidence that intervention affects the level of the exchange rate in an economically meaningful way. A purchase of foreign currency of 1 percentage point of GDP causes a depreciation of the nominal and real exchange rates in the ranges of [1.7-2.0] percent and [1.4-1.7] percent respectively. The effects are found to be quite persistent. The paper also explores possible asymmetric effects, and whether effectiveness depends on the depth of domestic financial markets.


Book Synopsis Unveiling the Effects of Foreign Exchange Intervention by : Gustavo Adler

Download or read book Unveiling the Effects of Foreign Exchange Intervention written by Gustavo Adler and published by International Monetary Fund. This book was released on 2015-06-23 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the effect of foreign exchange intervention on the exchange rate relying on an instrumental-variables panel approach. We find robust evidence that intervention affects the level of the exchange rate in an economically meaningful way. A purchase of foreign currency of 1 percentage point of GDP causes a depreciation of the nominal and real exchange rates in the ranges of [1.7-2.0] percent and [1.4-1.7] percent respectively. The effects are found to be quite persistent. The paper also explores possible asymmetric effects, and whether effectiveness depends on the depth of domestic financial markets.

Shocks Matter: Managing Capital Flows with Multiple Instruments in Emerging Economies

Shocks Matter: Managing Capital Flows with Multiple Instruments in Emerging Economies

Author: Mr.Ruy Lama

Publisher: International Monetary Fund

Published: 2020-06-19

Total Pages: 44

ISBN-13: 151354568X

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We study the optimal management of capital flows in a small open economy model with financial frictions and multiple policy instruments. The paper reports two main findings. First, both foreign exchange intervention (FXI) and macroprudential polices are tools complementary to the monetary policy rate that can largely reduce inflation and output volatility in a scenario of capital outflows. Second, the optimal policy mix depends on the underlying shock driving capital flows. FXI takes the leading role in response to foreign interest rate shocks, while macroprudential policy becomes the prominent tool for domestic risk shocks. These results highlight the importance of calibrating the use of multiple instruments according to the underlying shocks that induce shifts in capital flows.


Book Synopsis Shocks Matter: Managing Capital Flows with Multiple Instruments in Emerging Economies by : Mr.Ruy Lama

Download or read book Shocks Matter: Managing Capital Flows with Multiple Instruments in Emerging Economies written by Mr.Ruy Lama and published by International Monetary Fund. This book was released on 2020-06-19 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the optimal management of capital flows in a small open economy model with financial frictions and multiple policy instruments. The paper reports two main findings. First, both foreign exchange intervention (FXI) and macroprudential polices are tools complementary to the monetary policy rate that can largely reduce inflation and output volatility in a scenario of capital outflows. Second, the optimal policy mix depends on the underlying shock driving capital flows. FXI takes the leading role in response to foreign interest rate shocks, while macroprudential policy becomes the prominent tool for domestic risk shocks. These results highlight the importance of calibrating the use of multiple instruments according to the underlying shocks that induce shifts in capital flows.

Facing the Tides

Facing the Tides

Author: Mr.Harald Finger

Publisher: International Monetary Fund

Published: 2019-10-22

Total Pages: 76

ISBN-13: 1513512331

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This paper looks empirically at some economic effects of volatile exchange rates and financial conditions and examines policy responses for managing such volatility. It also sheds light on some economic costs that stem from volatile capital flows and exchange rates and analyzes how countries deploy their policy toolkits in response. The data-driven analysis should contribute to ongoing reflections about how to manage volatile capital flows and exchange rates both in Asian EMEs and more broadly.


Book Synopsis Facing the Tides by : Mr.Harald Finger

Download or read book Facing the Tides written by Mr.Harald Finger and published by International Monetary Fund. This book was released on 2019-10-22 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper looks empirically at some economic effects of volatile exchange rates and financial conditions and examines policy responses for managing such volatility. It also sheds light on some economic costs that stem from volatile capital flows and exchange rates and analyzes how countries deploy their policy toolkits in response. The data-driven analysis should contribute to ongoing reflections about how to manage volatile capital flows and exchange rates both in Asian EMEs and more broadly.

Exchange-Rate Swings and Foreign Currency Intervention

Exchange-Rate Swings and Foreign Currency Intervention

Author: Andrew Filardo

Publisher: International Monetary Fund

Published: 2022-07-29

Total Pages: 41

ISBN-13:

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This paper develops a new approach for exploring the effectiveness of foreign currency intervention, focusing on real exchange cycles. Using band spectrum regression methods, it examines the role of macroeconomic fundamentals in determining the equilibrium real exchange rate at short-, medium-, and low frequencies. Next, it 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 using different techniques to mitigate endogeneity concerns. 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, and with the duration of one-sided interventions. FX sales appear to be somewhat more effective than FX purchases, and intervention is less effective in more liquid FX markets.


Book Synopsis Exchange-Rate Swings and Foreign Currency Intervention by : Andrew Filardo

Download or read book Exchange-Rate Swings and Foreign Currency Intervention written by Andrew Filardo and published by International Monetary Fund. This book was released on 2022-07-29 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops a new approach for exploring the effectiveness of foreign currency intervention, focusing on real exchange cycles. Using band spectrum regression methods, it examines the role of macroeconomic fundamentals in determining the equilibrium real exchange rate at short-, medium-, and low frequencies. Next, it 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 using different techniques to mitigate endogeneity concerns. 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, and with the duration of one-sided interventions. FX sales appear to be somewhat more effective than FX purchases, and intervention is less effective in more liquid FX markets.