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Exchange-Rate Swings and Foreign Currency Intervention
Author:
Andrew Filardonull

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Mr. R. G Gelos
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https://orcid.org/0000-0003-4362-676X
, and
Thomas McGregornull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2022: Issue 158
Language:
English
Publication Date:
29 Jul 2022
DOI:
https://doi.org/10.5089/9798400215322.001
ISBN:
9798400215322
ISSN:
1018-5941
Pages:
41
Keywords:
Foreign exchange intervention; real exchange rates; equilibrium exchange rate; classical cycles; central banking; band spectrum regression.; exchange rate intervention; macro fundamentals; FX sale; FX purchase; FX intervention; measuring exchange rate misalignment; Exchange rates; Real effective exchange rates; Foreign assets; Global
Legal-disclaimer:
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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This paper develops a new approach for exploring the effectiveness of foreign currency intervention, focusing on real exchange cycles. Using band spectrum regression methods, it examines the role of macroeconomic fundamentals in determining the equilibrium real exchange rate at short-, medium-, and low frequencies. Next, it assesses the effectiveness of FX intervention depending on the degree of cycle-specific misalignments for 26 advanced- and emerging market economies, covering the period 1990–2018, and using different techniques to mitigate endogeneity concerns. Evidence supports the hypothesis that central banks can lean effectively against short-run cyclical misalignments of the real exchange rate. The effects are present in quarterly data—i.e., at policy-relevant horizons. The effectiveness of intervention rises with the size of the misalignment, and with the duration of one-sided interventions. FX sales appear to be somewhat more effective than FX purchases, and intervention is less effective in more liquid FX markets.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2022: Issue 158