Leaning-against-the-wind intervention and the “carry-trade” view of the cost of reserves
We estimate, for a sample of emerging economies, the quasi-fiscal costs of sterilized foreign exchange interventions as the P&L of an inverse carry trade. We show that these costs can be substantial when intervention has a neo-mercantilist motive (preserving an undervalued currency) or a stabil...
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Universidad Torcuato Di Tella
2024
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| Acceso en línea: | https://repositorio.utdt.edu/handle/20.500.13098/13100 https://doi.org/10.1007/s11079-022-09689-z |
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I57-R163-20.500.13098-131002025-03-21T21:48:21Z Leaning-against-the-wind intervention and the “carry-trade” view of the cost of reserves Levy Yeyati, Eduardo Gómez, Juan Francisco Política Monetaria Monetary policy Banco Central Central Bank Exchange rates Foreign exchange intervention International reserves Self-insurance We estimate, for a sample of emerging economies, the quasi-fiscal costs of sterilized foreign exchange interventions as the P&L of an inverse carry trade. We show that these costs can be substantial when intervention has a neo-mercantilist motive (preserving an undervalued currency) or a stabilization motive (appreciating the exchange rate as a nominal anchor), but are rather small when interventions follow a countercyclical, leaning-against-the-wind (LAW) pattern to contain exchange rate volatility. We document that under LAW, central banks outperform a constant size carry trade, as they additionally benefit from buying against cyclical deviations, and that the cost of reserves under the carry-trade view is generally lower than the one obtained from the credit-risk view (which equals the marginal cost to the country´s sovereign spread). Documento de Trabajo 2022/02 /// Este Documento de Trabajo fue posteriormente publicado como artículo en Levy-Yeyati, E., Gómez, J.F. Leaning-Against-the-Wind Intervention and the “Carry-Trade” View of the Cost of Reserves. Open Econ Rev 33, 853–877 (2022). 2024-10-07T13:49:10Z 2024-10-07T13:49:10Z 2022 info:eu-repo/semantics/article info:eu-repo/semantics/acceptedVersion https://repositorio.utdt.edu/handle/20.500.13098/13100 https://doi.org/10.1007/s11079-022-09689-z eng Levy-Yeyati, E., Gómez, J.F. Leaning-Against-the-Wind Intervention and the “Carry-Trade” View of the Cost of Reserves. Open Econ Rev 33, 853–877 (2022). info:eu-repo/semantics/openAccess https://creativecommons.org/licenses/by-sa/2.5/ar/ 22 p. application/pdf application/pdf Universidad Torcuato Di Tella Escuela de Gobierno |
| institution |
Universidad Torcuato Di Tella |
| institution_str |
I-57 |
| repository_str |
R-163 |
| collection |
Repositorio Digital Universidad Torcuato Di Tella |
| language |
Inglés |
| orig_language_str_mv |
eng |
| topic |
Política Monetaria Monetary policy Banco Central Central Bank Exchange rates Foreign exchange intervention International reserves Self-insurance |
| spellingShingle |
Política Monetaria Monetary policy Banco Central Central Bank Exchange rates Foreign exchange intervention International reserves Self-insurance Levy Yeyati, Eduardo Gómez, Juan Francisco Leaning-against-the-wind intervention and the “carry-trade” view of the cost of reserves |
| topic_facet |
Política Monetaria Monetary policy Banco Central Central Bank Exchange rates Foreign exchange intervention International reserves Self-insurance |
| description |
We estimate, for a sample of emerging economies, the quasi-fiscal costs of sterilized foreign exchange interventions as the P&L of an inverse carry trade. We show that
these costs can be substantial when intervention has a neo-mercantilist motive (preserving an undervalued currency) or a stabilization motive (appreciating the
exchange rate as a nominal anchor), but are rather small when interventions follow a
countercyclical, leaning-against-the-wind (LAW) pattern to contain exchange rate
volatility. We document that under LAW, central banks outperform a constant size carry trade, as they additionally benefit from buying against cyclical deviations, and
that the cost of reserves under the carry-trade view is generally lower than the one obtained from the credit-risk view (which equals the marginal cost to the country´s sovereign spread). |
| format |
Artículo acceptedVersion |
| author |
Levy Yeyati, Eduardo Gómez, Juan Francisco |
| author_facet |
Levy Yeyati, Eduardo Gómez, Juan Francisco |
| author_sort |
Levy Yeyati, Eduardo |
| title |
Leaning-against-the-wind intervention and the “carry-trade” view of the cost of reserves |
| title_short |
Leaning-against-the-wind intervention and the “carry-trade” view of the cost of reserves |
| title_full |
Leaning-against-the-wind intervention and the “carry-trade” view of the cost of reserves |
| title_fullStr |
Leaning-against-the-wind intervention and the “carry-trade” view of the cost of reserves |
| title_full_unstemmed |
Leaning-against-the-wind intervention and the “carry-trade” view of the cost of reserves |
| title_sort |
leaning-against-the-wind intervention and the “carry-trade” view of the cost of reserves |
| publisher |
Universidad Torcuato Di Tella |
| publishDate |
2024 |
| url |
https://repositorio.utdt.edu/handle/20.500.13098/13100 https://doi.org/10.1007/s11079-022-09689-z |
| work_keys_str_mv |
AT levyyeyatieduardo leaningagainstthewindinterventionandthecarrytradeviewofthecostofreserves AT gomezjuanfrancisco leaningagainstthewindinterventionandthecarrytradeviewofthecostofreserves |
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