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Foreign Exchange Intervention: A Dataset of Public Data and Proxies
Foreign exchange intervention (FXI) is a highly debated topic. Yet, comprehensive and comparable data on FXI is hard to find. This paper provides a new dataset of FXI covering a large number of countries over the period 2000-20 at monthly and quarterly frequencies. It includes publicly available data for about 40 countries and carefully constructed proxies for 122 countries. Proxies are focused on both spot and derivative transactions that alter the central bank’s foreign currency position and account for a wide range of central bank operations, including vis-à-vis residents, the first proxy to do so to our knowledge. The paper discusses the merits of the new proxy relative to coarser measures traditionally used like the change in reserves, and potential definitional differences with published data. The paper also presents stylized facts using our newly constructed FXI proxies.
Macroeconomic Impact of Foreign Exchange Intervention: Some Cross-country Empirical Findings
Based on VAR analyses across 26 countries, we show that, although foreign exchange intervention (FXI) is effective in stabilizing the nominal exchange rate in the short run, its impacts on the real exchange rate are less significant: Limitations on nominal exchange rate flexibility may induce adjustments to the real exchange rate through domestic prices. We find that countries that intervene more heavily in response to external shocks experience greater general and asset price volatility, which is not conducive to countering the impact of external shocks. We show that China’s macroeconomic responses to external shocks are broadly consistent with international experiences among intervening countries. The simple methodological framework adopted in this paper is meant to examine a broad set of macroeconomic variables and bears limitations; our findings serve to motivate more structural analysis on FXI’s macroeconomic impacts going forward.
Central Bank Independence and Inflation in Latin America—Through the Lens of History
We study the link between central bank independence and inflation by providing narrative and empiricial evidence based on Latin America’s experience over the past 100 years. We present a novel historical dataset of central bank independence for 17 Latin American countries and recount the rocky journey traveled by Latin America to achieve central bank independence and price stability. After their creation as independent institutions, central bank independence was eroded in the 1930s at the time of the Great Depression and following the abandonement of the gold exchange standard. Then, by the 1940s, central banks turned into de facto development banks under the aegis of governments, sawing t...
The Cost of Foreign Exchange Intervention
The accumulation of large foreign asset positions by many central banks through sustained foreign exchange (FX) intervention has raised questions about its associated fiscal costs. This paper clarifies conceptual issues regarding how to measure these costs both from an ex-post and an ex-ante (relevant for decision making) perspective, and estimates both marginal and total costs for 73 countries over the period 2002-13. We find ex-ante marginal costs for the median emerging market economy (EME) in the inter-quartile range of 2-5.5 percent per year; while ex-ante total costs (of sustaining FX positions) in the range of 0.2-0.7 percent of GDP per year for light interveners and 0.3-1.2 percent of GDP per year for heavy interveners. These estimates indicate that fiscal costs of sustained FX intervention (via expanding central bank balance sheets) are not negligible.
FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability
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.
The Dynamics of Trade Integration and Fragmentation in LAC
Trade barriers and poor infrastructure play an important role in limiting trade integration in Latin America and the Caribbean (LAC). Closing half of the infrastructure gap between LAC and advanced economies could lift exports by 30 percent. Reducing import tariffs could boost LAC’s trade, but its responsiveness is lower than in other EMDEs, particularly in the long run, due to the region’s specialization in agricultural exports with inelastic demand and supply constraints like growing cycles and weather conditions. Amid deepening global trade tensions, LAC is well placed to withstand a mild trade fragmentation scenario, in which trade barriers are erected only among large economies. However, the region’s output losses could be sizable in more extreme scenarios, where the global economy splinters into competing economic blocs and LAC loses access to important markets. Boosting trade, including regional trade, could pay a double dividend of lifting growth in the region while mitigating risks from global fragmentation.
Constraints on Trade in the LAC Region
This paper studies Latin America and the Caribbean’s (LAC) trade performance in recent years and estimates the salience of key country-specific factors in explaining underperformance in some sub-regions within LAC. First, the paper documents that, while the average country in the region displays aggregate trade values that are consistent with a standard gravity model, there is substantial heterogeneity across sub-regions and product-types. The paper then estimates an augmented gravity specification that includes proxies for the quality of infrastructure, the availability and quality of factors of production, and governance. Results point to infrastructure and customs regulation as key factors explaining undertrading in manufacturing in most sub-regions. Factors of production partly explain South America’s underpeformance in manufacturing while governance explains undertrading across most product groups, but neither set of factors play a significant role in other sub-regions.
An Estimated DSGE Model for Integrated Policy Analysis
We estimate a New Keynesian small open economy model which allows for foreign exchange (FX) market frictions and a potential role for FX interventions for a large set of emerging market economies (EMEs) and some inflation targeting (IT) advanced economy (AE) countries serving as a control group. Next, we use the estimated model to examine the empirical support for the view that interest rate policy may not be sufficient to stabilize output and inflation following capital outflow shocks, and the extent to which FX interventions (FXI) can improve policy tradeoffs. Our results reveal significant structural differences between AEs and EMEs—in particular FX market depth—leading to different transmission of capital outflow shocks which justifies occasional use of FXI in some EMEs in certain situations. Our analysis also highlights the critical importance of accounting for the endogeneity of FXI behavior when assessing FX market depth and policy tradeoffs associated with volatile capital flows in past episodes.
External Sector Report 2021
Produced since 2012, the IMF’s annual External Sector Report analyzes global external developments and provides multilaterally consistent assessments of external positions, including current accounts, real exchange rates, external balance sheets, capital flows, and international reserves, of the world’s largest economies, representing over 90 percent of global GDP. Chapter 1 discusses the evolution of global external positions in 2020, external developments throughout the COVID-19 crisis, and policy priorities for reducing excess imbalances over the medium term. Chapter 2 analyzes how the unprecedented fiscal support provided in response to the COVID-19 crisis has affected external posit...
