Rory Mullen

We study the impact of foreign exchange interventions during periods of tight credit constraints. Expanding on the Gabaix and Maggiori (2015) model, we predict that long-lived spot interventions have larger effects on exchange rates than short-lived swaps, unanticipated interventions are more impactful, and tighter credit constraints amplify effects. Using high-frequency data on Brazilian Central Bank interventions from 1999 to 2023, we find that unanticipated spot sales of USD reserves lead to significant domestic currency appreciation and reduced covered interest parity deviations. Spot interventions outperform swaps, especially when global intermediaries are constrained, and enhance market efficiency by lowering USD borrowing costs.

Pairwise covariances of firm growth rates appear to drive the variance of aggregate growth rates in productivity, sales, and profit for public firms in the United States over the last half-century. High-productivity firms contribute most to the covariances driving aggregate variance, but least per dollar of market value that they generate. This fact may explain why investors demand lower returns from high-productivity firms. A tractable model of within-firm diversification qualitatively matches the empirical evidence, generating endogenous first and second moments of firm and aggregate productivity, and endogenous comovement between firm and aggregate productivity. In the model, movements in firm productivity drive movements in firm sales and profit, and firms’ expected excess stock returns rise as firms’ productivities covary more with aggregate productivity, relative to their market values. A regression analysis lends tentative empirical support to several predictions of the model.