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

Author

Listed:
  • Damiano Sandri
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 from an ex-ante perspective, suggesting that FX intervention is used to stabilize the exchange rate against temporary excessive fluctuations relative to UIP conditions. Consistent with this interpretation, we document that the direction and size of FX intervention respond to UIP deviations. We also find that FX intervention respond more aggressively to UIP deviations when there is less uncertainty about the future level of the exchange rate and when the exchange rate is overvalued.

Suggested Citation

  • Damiano Sandri, 2022. "FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability," BIS Working Papers 1059, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:1059
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    References listed on IDEAS

    as
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    Cited by:

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    2. Kyriazis, Nikolaos & Corbet, Shaen, 2024. "The role of international currency spillovers in shaping exchange rate dynamics in Latin America," The Quarterly Review of Economics and Finance, Elsevier, vol. 94(C), pages 1-10.

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    More about this item

    Keywords

    FX intervention; profitability; exchange rate;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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