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

30 Pages Posted: 11 Nov 2015 Last revised: 18 Feb 2018

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Gustavo Adler

International Monetary Fund (IMF) - Research Department

Irineu de Carvalho Filho

International Monetary Fund (IMF)

Multiple version iconThere are 3 versions of this paper

Date Written: November 1, 2015

Abstract

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.

Keywords: foreign exchange intervention, exchange rate, capital flows, gross capital flows

JEL Classification: E42, E58, F31, F40

Suggested Citation

Blanchard, Olivier J. and Adler, Gustavo and de Carvalho Filho, Irineu, Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? (November 1, 2015). Peterson Institute for International Economics Working Paper No. 15-18. Available at SSRN: https://ssrn.com/abstract=2688758 or http://dx.doi.org/10.2139/ssrn.2688758

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Gustavo Adler

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Irineu De Carvalho Filho

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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