Central Bank Reserves and Currency Volatility

47 Pages Posted: 27 Jun 2019

Date Written: June 24, 2019

Abstract

In light of the evidence on significant accumulations in foreign reserves in the post-crisis period, we investigate the neutrality of Central Bank interventions and the collateral implications on their balance sheets. We present a hybrid macro-microstructure model in which foreign exchange rate intervention flow is a non-linear mapping of the market order flow, that is, the net of buyer-initiated over seller-initiated dealers' trades. Simulations in the cases of Brazil and the UK show that small daily drifts in the order flow can lead to major impacts on the stock of foreign reserves. The likelihood of this (adverse) effect on foreign reserves increases with the Central Bank's inability to adopt a neutral policy with respect to exchange rate drifts.

Keywords: exchange rate, central bank interventions, reserve accumulation

JEL Classification: F31, F33, F37

Suggested Citation

Ferreira, Alex Luiz and Gozluklu, Arie Eskenazi and Mainente, Joao, Central Bank Reserves and Currency Volatility (June 24, 2019). Available at SSRN: https://ssrn.com/abstract=3409832 or http://dx.doi.org/10.2139/ssrn.3409832

Alex Luiz Ferreira (Contact Author)

University of São Paulo ( email )

Av. Bandeirantes 3900 - Monte Alegre
Ribeião Preto, 14040-900
Brazil

Arie Eskenazi Gozluklu

University of Warwick ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

HOME PAGE: http://www.arieskenazi.com

Joao Mainente

Gol airlines ( email )

+55(11)50982114 (Phone)

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