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The Cost of Foreign Exchange Intervention: Concepts and Measurement
Author:
Gustavo Adler
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Rui Mano
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Series:
IMF Working Papers
Volume/Issue:
Volume 2016: Issue 089
Language:
English
Publication Date:
08 Apr 2016
DOI:
https://doi.org/10.5089/9781484323076.001
ISBN:
9781484323076
ISSN:
1018-5941
Pages:
37
Keywords:
WP; exchange rate; risk premium; central bank balance sheet; international reserves; foreign exchange intervention; currency risk premium; risk premia; FX position; post cost; cost of FXI; FX intervention; incurred cost; Exchange rates; Currencies; Exchange rate adjustments; Interest rate parity; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund