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The Cost of Foreign Exchange Intervention

2016-04-12 Business & Economics
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Release : 2016-04-12
Genre : Business & Economics
Kind : eBook
Book Rating : 30X/5 ( reviews)

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Book Synopsis The Cost of Foreign Exchange Intervention by : Gustavo Adler

Download or read book The Cost of Foreign Exchange Intervention written by Gustavo Adler. This book was released on 2016-04-12. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Unveiling the Effects of Foreign Exchange Intervention

2015-06-23 Business & Economics
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Release : 2015-06-23
Genre : Business & Economics
Kind : eBook
Book Rating : 865/5 ( reviews)

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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. This book was released on 2015-06-23. 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.

Foreign Exchange Intervention under Policy Uncertainty

2016-03-23 Business & Economics
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Release : 2016-03-23
Genre : Business & Economics
Kind : eBook
Book Rating : 234/5 ( reviews)

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Book Synopsis Foreign Exchange Intervention under Policy Uncertainty by : Gustavo Adler

Download or read book Foreign Exchange Intervention under Policy Uncertainty written by Gustavo Adler. This book was released on 2016-03-23. Available in PDF, EPUB and Kindle. Book excerpt: We study the use of foreign exchange (FX) intervention as an additional policy instrument in an environment with learning, where agents infer the central bank policy rules from its policy actions. Under full information, a central bank focused on stabilizing output and inflation can achieve better outcomes by using FX intervention as an additional policy tool. Under policy uncertainty, where agents perceive that monetary policy may also have exchange rate stabilization goals, the use of FX intervention entails a trade-off, reducing output volatility while increasing inflation volatility. While having an additional policy tool is always beneficial, we find that the optimal magnitude of intervention is higher in monetary policy regimes with lower uncertainty. These results indicate that the benefits of using FX intervention as an additional stabilization tool are greater in regimes where monetary policy is credibly focused on output and inflation stabilization.

Foreign Exchange Intervention Rules for Central Banks: A Risk-based Framework

2021-02-12 Business & Economics
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Release : 2021-02-12
Genre : Business & Economics
Kind : eBook
Book Rating : 406/5 ( reviews)

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Book Synopsis Foreign Exchange Intervention Rules for Central Banks: A Risk-based Framework by : Romain Lafarguette

Download or read book Foreign Exchange Intervention Rules for Central Banks: A Risk-based Framework written by Romain Lafarguette. This book was released on 2021-02-12. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating exchange rate arrangements. The FXI rule addresses a market failure: the absence of hedging solution for tail exchange rate risk in the market (i.e. high volatility). Market impairment or overshoot of exchange rate between two equilibria could generate high volatility and threaten financial stability due to unhedged exposure to exchange rate risk in the economy. The rule uses the concept of Value at Risk (VaR) to define FXI triggers. While it provides to the market a hedge against tail risk, the rule allows the exchange rate to smoothly adjust to new equilibria. In addition, the rule is budget neutral over the medium term, encourages a prudent risk management in the market, and is more resilient to speculative attacks than other rules, such as fixed-volatility rules. The empirical methodology is backtested on Banco Mexico’s FXIs data between 2008 and 2016.

Official Intervention in the Foreign Exchange Market

2003-07-01 Business & Economics
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Release : 2003-07-01
Genre : Business & Economics
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Book Rating : 11X/5 ( reviews)

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Book Synopsis Official Intervention in the Foreign Exchange Market by : Roberto Pereira Guimarães

Download or read book Official Intervention in the Foreign Exchange Market written by Roberto Pereira Guimarães. This book was released on 2003-07-01. Available in PDF, EPUB and Kindle. Book excerpt: This paper offers guidance on the operational aspects of official intervention in the foreign exchange market, particularly in developing countries with flexible exchange rate regimes. A brief survey of the literature and country experience is followed by an analysis of the objectives, timing, amount, degree of transparency, and choice of markets and counterparties in conducting intervention. The analysis highlights the difficulty of detecting exchange rate misalignments and disorderly markets, and argues in favor of parsimony in official intervention. Determining the timing and amount of intervention is a highly subjective excercise, and some degree of discretion is almost necessary, though policy rules may serve as "rules of thumb."

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