Reserves Management and FX Intervention
11 Pages Posted: 13 Dec 2019
Date Written: October 31, 2019
Over the last decade, emerging market economies have faced shocks arising from both external events and idiosyncratic factors. Brazil took advantage of benign conditions in the first decade of the century to substantially increase its foreign reserves, achieving reserves adequacy on several different criteria in the view of the IMF 2018 External Sector Report. These reserves served as macroeconomic insurance, reducing FX volatility and the risk premium during periods of market turmoil, while underpinning monetary and financial stability. In addition to accumulating reserves from interventions to “lean against” capital inflows, Brazil’s FX interventions have been designed to address liquidity shortages and excess volatility, and to provide hedging. To these ends, the Central Bank of Brazil has used instruments that range from regular spot transactions through forwards, repo lines of credit to FX swaps – or synthetic futures. The ultimate aim of these interventions is to guarantee a properly functioning FX market.
Full Publication: Reserve Management and FX Intervention
Keywords: Foreign reserves accumulation, FX intervention instruments, FX intervention motivations
JEL Classification: E5, E6, E60, H1, H12, O2, O24
Suggested Citation: Suggested Citation