Exchange-Rate Swings and Foreign Currency Intervention

By Andrew Filardo, Gaston Gelos, Thomas McGregor

July 29, 2022

Preview Citation

Format: Chicago

Andrew Filardo, Gaston Gelos, and Thomas McGregor. Exchange-Rate Swings and Foreign Currency Intervention, (USA: International Monetary Fund, 2022) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper develops a new approach for exploring the effectiveness of foreign currency intervention, focusing on real exchange cycles. Using band spectrum regression methods, it examines the role of macroeconomic fundamentals in determining the equilibrium real exchange rate at short-, medium-, and low frequencies. Next, it assesses the effectiveness of FX intervention depending on the degree of cycle-specific misalignments for 26 advanced- and emerging market economies, covering the period 1990–2018, and using different techniques to mitigate endogeneity concerns. Evidence supports the hypothesis that central banks can lean effectively against short-run cyclical misalignments of the real exchange rate. The effects are present in quarterly data—i.e., at policy-relevant horizons. The effectiveness of intervention rises with the size of the misalignment, and with the duration of one-sided interventions. FX sales appear to be somewhat more effective than FX purchases, and intervention is less effective in more liquid FX markets.

Subject: Exchange rates, External position, Foreign assets, Foreign exchange, Foreign exchange intervention, Real effective exchange rates, Real exchange rates

Keywords: Band spectrum regression., Central banking, Classical cycles, Equilibrium exchange rate, Exchange rate intervention, Exchange rates, Foreign assets, Foreign exchange intervention, FX intervention, FX purchase, FX sale, Global, Macro fundamentals, Measuring exchange rate misalignment, Real effective exchange rates, Real exchange rates

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/158
Stock No:

WPIEA2022158
ISBN:

9798400215322
ISSN:

1018-5941

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