Foreign Exchange Interventions and Intermediary Constraints
Abstract: 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.
Figure: Distributions of Central Bank Intervention Thresholds
Notes. The figure shows normal density functions for the Central Bank's intervention thresholds, as perceived by Households and the Financier in period t. The distributions are characterized by means and standard deviations, which the Central Bank communicates to Households and the Financier. The shaded region shows the probability, as perceived by Households and the Financier, that the Central Bank will intervene positively by purchasing Home bonds and selling Foreign bonds to strengthen Home currency. The perceived probability of intervention is approximately equal to the shaded probability in the figure, because the probability of a negative intervention is approximately zero.
BibTeX Citation
@article{Ferreira2025FXIntervention,
title={Foreign Exchange Interventions and Intermediary Constraints},
author={Alex Ferreira and Rory Mullen and Giovanni Ricco and Ganesh Viswanath-Natraj and Zijie Wang},
journal={Working Paper},
year={2025}
}