The Cost of Foreign Exchange Intervention: Concepts and Measurement

38 Pages Posted: 9 Dec 2016

See all articles by Gustavo Adler

Gustavo Adler

International Monetary Fund (IMF) - Research Department

Rui C. Mano

International Monetary Fund

Date Written: April 2016

Abstract

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.

Keywords: Foreign exchange intervention, Risk premium, Fiscal analysis, Econometric models, central bank balance sheet, international reserves, foreign exchange intervention, currency risk premium

JEL Classification: E42, E58, F31, F40

Suggested Citation

Adler, Gustavo and Mano, Rui C., The Cost of Foreign Exchange Intervention: Concepts and Measurement (April 2016). IMF Working Paper No. 16/89. Available at SSRN: https://ssrn.com/abstract=2882653

Gustavo Adler (Contact Author)

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

700 19th Street NW
Washington, DC 20431
United States

Rui C. Mano

International Monetary Fund ( email )

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

HOME PAGE: http://sites.google.com/site/ruimano/

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