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

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...

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Bibliographic Details
Published in:Policy File 2015
Main Authors: Blanchard, Olivier, J, Adler, Gustavo, Filho, Irineu E Carvalho
Format: Report
Language:English
Subjects:
Developing countries
Economic policy
International Monetary Fund
LDCs
Online Access:Request full text
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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.