The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
We study the effect of foreign exchange intervention on the exchange rate relying on an
instrumental-variables panel approach. We find robust evidence that intervention affects the
level of the exchange rate in an economically meaningful way. A purchase of foreign currency
of 1 percentage point of GDP causes a depreciation of the nominal and real exchange rates in
the ranges of [1.7-2.0] percent and [1.4-1.7] percent respectively. The effects are found to be
quite persistent. The paper also explores possible asymmetric effects, and whether
effectiveness depends on the depth of domestic financial markets.