Working Paper: NBER ID: w21427
Authors: Olivier Blanchard; Gustavo Adler; Irineu de Carvalho Filho
Abstract: Many emerging market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. In this paper, we study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, we find that larger FXI leads to less exchange rate appreciation in response to gross inflows.
Keywords: foreign exchange intervention; capital flows; exchange rate; emerging markets
JEL Codes: F31; F38; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| gross capital inflows (F21) | exchange rate appreciation (F31) |
| foreign exchange intervention (FXI) (F31) | less exchange rate appreciation (F31) |
| foreign exchange intervention (FXI) (F31) | dampen appreciation pressures from gross capital inflows (F32) |