Foreign Exchange Intervention Research Articles

Foreign exchange intervention for commodity booms and busts

While the conventional policy prescription for dealing with commodity price shocks is the adoption of a flexible exchange rate regime, a view popularized by Friedman (1953), in practice many emerging economies decide to intervene in the foreign exchange market. In this paper, we evaluate the optimal exchange rate policy response to commodity price shocks in a small open economy model with learning-by-doing (LBD) externalities. We find that the optimal policy response to a commodity boom involves a large and sustained increase in the stock of foreign exchange reserves aimed at stabilizing the real exchange rate and tradable production. Moreover, the optimal policy resembles the actual dynamics of foreign exchange reserves observed in many emerging commodity-exporting economies during recent episodes of commodity booms. We also show that solely relying on monetary policy for dealing with commodity price shocks provides limited macroeconomic stabilization gains, as the policy rate is an ineffective instrument for addressing LBD externalities.

Detecting persistent one‐sided intervention in foreign exchange markets: A simple test

AbstractThis paper examines currency manipulation policies in foreign exchange markets. In particular, we focus on whether a country has implemented one‐sided interventions that mostly lean against the appreciation wind in foreign exchange markets. Using quarterly data from 1998:Q1 to 2017:Q2 for 10 emerging countries, we find that China, Singapore, and Taiwan engaged in one‐sided interventions. A further rolling regression analysis shows some moderate evidence that Taiwan is the only country conducting one‐sided interventions on a continuing basis.

РЕЖИМ ВАЛЮТНОГО КУРСУ ЯК ОБ’ЄКТ РЕГУЛЯТОРНОЇ ПОЛІТИКИ ДЕРЖАВИ В УМОВАХ ВІДКРИТОСТІ НАЦІОНАЛЬНОЇ ЕКОНОМІКИ

The article summarizes the patterns of development of exchange rate policy in Ukraine as the transition from administrative to economic methods of regulating the foreign exchange market in the process of increasing the degree of its liberalization. It is shown that the evolution of the exchange rate regime is described by the following chain: fixed, currency corridor, flexible, adjustable-floating, floating. The change in the objects of monetary targeting took place in the following sequence: credit channel, monetary aggregates, exchange rate, inflation. The main task of the NBU's exchange rate policy is to ensure price stability, and an additional one is the impact on the hryvnia exchange rate. It is determined that currently the main instrument of the NBU's monetary policy is the interest rate, and foreign exchange interventions are ancillary to the inflation targeting and floating exchange rate, which acts as a compensator for negative foreign exchange shocks and supports the competitiveness of producers. It is shown that within the current exchange rate regime in Ukraine foreign exchange interventions are carried out on the principles of reducing the role, scale and frequency as the currency market is liberalized, non-interference in its fundamental trends, priority of foreign exchange demand by foreign exchange market participants. and transparency of the criteria for the participation of entities in auctions and bidding. It is argued that the purpose of foreign exchange interventions is: replenishment of official foreign exchange reserves, smoothing the shortcomings of the foreign exchange market in case of its limited ability to self-regulate, loss of benchmarks for pricing, high exchange rate volatility, which negatively affects the currency security of the state and businesses. It is established that between foreign exchange interventions and the interest rate there is a transmission mechanism to strengthen the main instrument in regulating the foreign exchange and monetary markets on the principles of effectiveness of its consequences for the economy in case of adequate perception of NBU signals.

Foreign exchange intervention: A new database

We construct a novel database of monthly foreign exchange interventions for 49 countries over up to 22 years. We build on a text classification approach that extracts information about interventions from news articles and calibrate our procedure to data about actual interventions. Our new dataset allows us to document stylized facts about the use of foreign exchange interventions for countries that neither publish their data nor make them available to researchers. Moreover, we show that foreign exchange interventions are used in a complementary way with capital controls and macroprudential regulation.

Central Bank Intervention in the Inflation Targeting

Abstract This paper analyses the impact of central bank interventions in the inflation targeting regime. The results of empirical studies in this paper show if there is a shock of the exchange rate, which would lead to depreciation of the exchange rate, a central bank may decide to mush instability on the foreign exchange market with foreign exchange interventions, thereby preventing the sudden exchange rate depreciation, which would then require a smaller reaction by the interest rate. Namely, through foreign exchange interventions, the central bank greatly absorbs the depreciation shock and, consequently, inflation is lower. As a result of lower price growth, the need for a monetary policy response to an interest rate is also lower. Based on this example, we can see that central bank intervention in some cases can be very useful in order to correct disturbances in the foreign exchange market. Therefore, some central banks accumulate foreign exchange reserves at a very high level so as to have enough space for foreign exchange intervention, without the risk of falling foreign exchange reserves below the optimum level.

Inelastic Financial Markets and Foreign Exchange Interventions

Inelastic Financial Markets and Foreign Exchange Interventions

Foreign Exchange Interventions and Their Impact on Expectations: Evidence from the Usd/Ils Options Market

Foreign Exchange Interventions and Their Impact on Expectations: Evidence from the Usd/Ils Options Market

Foreign Exchange Interventions and Their Impact on Expectations: Evidence from the Usd/Ils Options Market

Foreign Exchange Interventions and Their Impact on Expectations: Evidence from the Usd/Ils Options Market

UKRAINE’S MONETARY POLICY EFFECTIVENESS UNDER WAR

Introduction. Notwithstanding the Ukrainian banking system's resilience under war, there are devaluation and inflation pressures. In turn, monetary policy is found to be vital to combat drastic GDP decline and FX reserve depletion. Materials and methods. In an attempt to examine the effectiveness of the NBU's (National bank of Ukraine) monetary policy, the article employs comparative and statistical analysis of its instruments based on data regarding dynamics of key and other interest rates (deposits, loans, certificate of deposits, refinancing, DGBs), volumes of foreign exchange interventions and international reserves, DGBs. Results and discussion. This paper summarises the fundamental changes in monetary policy since the beginning of the full-scale war. The findings demonstrate a shift from the policy priority of inflation targeting and a freely floating exchange rate in favour of monetary financing of the budget deficit. At the same time, the devaluation of the national currency is restrained mainly at the expense of international credit and grant funds, which makes it possible to cover the losses of the NBU's FX reserves to support the exchange rate and carry out additional money issuance. The results show that under the war, the NBU's monetary policy is effective in limiting devaluation processes due to the timely introduction of a fixed exchange rate, strengthening of currency restrictions and their further adjustment. However, due to the increase in the discount rate and the corresponding increase in interest rates on certificates of deposit and refinancing and a slight increase in deposits, DGBs did not restrain inflation due to the lack of alternative monetary financing of the budget deficit. Further focus exclusively on the inflation targeting regime does not meet the current tasks of monetary policy and thereby reduces its effectiveness. The current budget dependence on monetary financing requires optimising monetary expansion measures in order to flow the issuing money from the military to the consumer market. Conclusions. The effectiveness of inflation targeting with limited monetary policy transmission indicates that the NBU should focus on other goals equally crucial to maintaining price stability, such as limiting exchange rate fluctuations and monetary financing for economic growth. In post-war recovery, the monetary policy direction solely on inflation targeting will remain inappropriate, given the mainly non-monetary factors of inflation.

Systematic Foreign Exchange Intervention and Macroeconomic Stability: A Bayesian DSGE Approach

Systematic Foreign Exchange Intervention and Macroeconomic Stability: A Bayesian DSGE Approach

Sudden Stops and Optimal Foreign Exchange Intervention

Sudden Stops and Optimal Foreign Exchange Intervention

Corrigendum to: A Theory of Foreign Exchange Interventions

Corrigendum to: A Theory of Foreign Exchange Interventions

Breaking the UIP: A Model‐Equivalence Result

AbstractBreaking the uncovered interest rate parity (UIP) is essential to accounting for exchange rate dynamics, and is required for modeling sterilized foreign exchange interventions. Gabaix and Maggiori (2015) account for many exchange rate puzzles by introducing financial intermediaries that absorb savings imbalances for a premium, thereby deviating from the UIP. Fanelli and Straub (2021) analyze foreign exchange interventions. In their model, regulatory exposure limits and participation cost in the international financial markets drive a wedge in the UIP. This paper demonstrates that, to a first‐order approximation, introducing a reduced‐form portfolio adjustment cost is isomorphic to these modeling strategies.

Patterns of foreign exchange intervention under inflation targeting

The paper documents the use of foreign exchange intervention (FXI) across countries and monetary regimes, with special attention to its use under inflation targeting (IT). We find significant differences between advanced (AEs) and emerging market economies (EMEs). The former group conduct FXI limitedly and broadly symmetrically, while the use of this policy instrument in EMEs is pervasive and mostly asymmetric, with a bias toward purchasing foreign currency, even after taking precautionary motives into account. Within emerging markets, the use of FXI is common under both IT and non-IT regimes. We find no evidence of FXI being used in response to inflation developments, while strong evidence exists that FXI responds to exchange rate movements, indicating that IT central banks in EMEs have dual inflation/exchange-rate objectives. We also find a higher propensity to overshoot inflation targets in emerging market economies in which FXI is more pervasive.

Вплив чинників на управління безпекою валютного ринку в Україні

The article analyzes the principles of development and security management of the foreign exchange market of Ukraine. Substantiates the influence of factors on the functioning of the foreign exchange market such as: improvement of the regulatory framework; monetary policy on the stabilization of the floating exchange rate regime; lending to the National Bank of Ukraine within the current 18-month stand-by program from the International Monetary Fund; replenishment of the market currency through the purchase and sale of government bonds; the influence of international and domestic factors on the liberalization of the foreign exchange market in Ukraine; receipt of a share of currency more than 10% of the population working abroad; restoring the confidence of individuals and entrepreneurs in the national currency. The structure and analysis of the process and dynamics of the foreign exchange market of Ukraine are characterized. The author evaluates the security management of currency regulation of the floating exchange rate regime, which directly affects the state of the foreign exchange market (Fig. 1). The state of exchange rate regulation and its impact on the foreign exchange market on the basis of personal observation during 2015-2021 are studied. The main advantage of this article is the clarification of the elements of the mechanism of currency regulation, which is due to the negative impact of a wide range of external and internal factors on the tools (Fig. 2). This mechanism is a powerful lever of state management of economic security and regulation of foreign exchange market liberalization in the context of a significant deterioration of the crisis situation in Ukraine in recent years. The main areas of security management of the mechanism of functioning of the foreign exchange market of Ukraine are the following. The first is optimization of the procedure of foreign exchange interventions of the NBU – schedule, parameters of interventions. This will increase the transparency and predictability of NBU operations in the foreign exchange market. NBU managers should abandon discriminatory approach to ensure all banks have equal access to interventions. The second is increasing of the digitization and disclosure of communication policies with actors. Its deterioration is due to negative comments addressed to banks regarding speculative actions on exchange rate formation, non-compliance with the requirements of the NBU in lending, security management and customer distrust. The third is strengthening of the reserve requirements for bank security management in order to reduce the excessive liquidity of the banking system.

The Dynamic Impact of FX Interventions on Financial Markets

Abstract Evidence on the effectiveness of foreign exchange (FX) interventions is either limited to short horizons or hampered by debatable identification. We address these limitations by identifying a structural vector autoregressive model for the daily frequency with an external instrument. Generally we find, for freely floating currencies, that FX intervention shocks significantly affect exchange rates and that this impact persists for months. The signaling channel dominates the portfolio channel. Moreover, interest rates tend to fall in response to sales of the domestic currency, whereas stock prices of large (exporting) firms increase after devaluation of the domestic currency.

Does trade cause fear of appreciation?

This paper identifies the fear-of-appreciation (Levy-Yeyati et al., 2013) channel through which trade balance affects domestic currency appreciations. By decomposing currency appreciations into a continuous and a discrete (jump) component, we find that only the discrete (jump) component of currency appreciation is significantly reduced by increases in trade balance, and this effect is stronger in countries with more foreign exchange interventions. The mediation analysis suggests that the fear-of-appreciation channel plays a unique role in the link between trade balance and the discrete (jump) component of domestic currency appreciations, above and beyond the fear-of-floating (Calvo and Reinhart, 2002) channel identified in prior literature.

Rounding the corners of the trilemma: A simple framework

Many emerging market economies use foreign exchange interventions or capital controls at the same time as they float their currencies, a policy mix that is not explained by Mundell’s policy trilemma. This paper presents a simple model that accounts for this fact. In the model, changes in foreign appetite for domestic assets lead to a trade-off between stabilizing the tradable sector and stabilizing the nontradable sector. The model is consistent with a number of stylized facts about the impact of the global financial cycle on emerging market economies, and on the policies used by emerging markets to mitigate this impact. Consistent with Rey’s dilemma thesis, the benefits of using countercyclical capital flow taxes may be substantially larger than the benefits of floating. The paper also discusses the reasons that capital flow taxes are not more popular in practice.

Foreign exchange interventions under a minimum exchange rate regime and the Swiss franc

AbstractIn this paper, a structural model is proposed that allows monetary authorities to determine the size of foreign exchange market interventions that are expected to be necessary to implement a minimum exchange rate regime. An empirical application of the proposed model to the minimum exchange rate regime that the Swiss National Bank (SNB) implemented vis‐à‐vis the euro from September 2011 to January 2015 reveals that it is well suited to explain the actual size of these interventions and that, in January 2015, the SNB’s euro purchases might have been large without the abandonment of the minimum exchange rate regime, which is consistent with the official statements of the SNB in the aftermath of that episode.

Sudden Stops in Emerging Economies: The Role of World Interest Rates and Foreign Exchange Intervention

Sudden Stops in Emerging Economies: The Role of World Interest Rates and Foreign Exchange Intervention