FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability

25 Pages Posted: 7 Jul 2020

See all articles by Damiano Sandri

Damiano Sandri

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: June 2020

Abstract

We analyze the profitability of FX swaps used by the central bank of Brazil to shed light on the rationale for FX intervention. We find that swaps are profitable in expectation, suggesting that FX intervention is used to stabilize the exchange rate in the face of temporary excessive movements rather than to manipulate it away from fundamental values. In line with this interpretation, we find that the scale of FX intervention responds to the degree of exchange rate misalignment relative to UIP conditions. We also document that intervention is more aggressive when there is less uncertainty about the medium-term level of the exchange rate and when the exchange rate is overvalued rather than undervalued.

JEL Classification: E58, F31, O24, E01, F16, G21, E52

Suggested Citation

Sandri, Damiano, FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability (June 2020). Available at SSRN: https://ssrn.com/abstract=3642660 or http://dx.doi.org/10.2139/ssrn.3642660

Damiano Sandri (Contact Author)

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

700 19th Street NW
Washington, DC 20431
United States

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