Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit, and Global Financial Cycles

Abstract

We show that local policy attenuates global financial cycle (GFC)’s spillovers. We exploit GFC shocks and Brazilian central bank interventions in FX derivatives using three matched administrative registers: credit, foreign credit to banks, and employer-employee. After U.S. Taper Tantrum (followed by Emerging Markets FX turbulence), Brazilian banks with more foreign debt cut credit supply, thereby reducing firm-level employment. A subsequent large policy intervention supplying derivatives against FX risks—hedger of last resort—halves the negative effects. A 2008-2015 panel exploiting GFC shocks and FX interventions confirms these results and the hedging channel. However, the policy entails fiscal and moral hazard costs.

Keywords: foreign exchange, monetary policy, central bank, bank credit, hedging

JEL Classification: E5, F3, G01, G21, G28