Unveiling the Effects of Foreign Exchange Intervention: A Panel Approach

Abstract

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. JEL Classification Numbers: E58, F31

The External Balance Assessment Methodology: 2018 Update

“…Derivatives include aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps), and financial instruments denominated in foreign currency but settled by other means (for example, in domestic currency), as reported in the International Reserves and Foreign Currency Liquidity Template. 19 Informed by recent relevant studies-like, Adler et al (2015), Daude et al (2016), and Bayoumi et al (2015)-, the instruments in the first-stage regression include: (a) a measure of global accumulation of reserves, capturing what is known in the reserve accumulation literature as the "keeping-up with-the-Joneses" effect, or the desire of countries to maintain FX liquidity (for precautionary motives) at par with peer emerging market countries (excluding own reserve accumulation for each country); (b) a measure of reserve adequacy linked to M2, which is defined as (M2-reserves)/GDP relative to the average emerging market group; and (c) an emerging market and developing economy dummy to capture the tendency of emerging markets and developing economies to accumulate reserves as part of their export-led growth strategies. Mendoza and Terrones (2012); and Gourinchas et al (2001).…”

Systematic Managed Floating

“…11 Frankel (2016) relates the G7's post-millennium renunciation of foreign exchange intervention. 12 Besides Fratzscher et al (2016), other recent studies of EM intervention include Adler, Lisack and Mano (2015), Tovar (2011), Blanchard, Adler, andde Carvalho Filho (2015), Daude, Levy- Yeyati and Nagengast (2014), Disyatat and Galati (2007) and the collection introduced by Mohanty (2013). Menkhoff (2013) surveys the earlier ones.…”

Did the Exchange Rate Floor Prevent Deflation in the Czech Republic?

“…4 Blanchard et al 2015 exploit the exogenous character of capital inflows to a small open economy and estimate the response of foreign exchange intervention and other macro-variables with a VAR. Adler et al (2015), in a panel setting and using instrumental variables, find evidence the interventions significantly affect the level of the exchange rate. In an earlier contribution, Adler and Tovar (2011) examines sterilized foreign exchange interventions in Latin America and confirm their effectiveness in mitigating appreciation pressures.…”