Template-Type: ReDIF-Paper 1.0
Author-Name: Eduardo Levy Yeyati
Author-Name: Juan  Francisco Gómez
Title: Leaning-against-the-wind Intervention and the “carry-trade” View of the Cost of Reserves
Abstract: For a sample of emerging economies, we estimate 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).
Creation-Date: 2022-10
Keywords: Exchange rates, foreign exchange intervention, international reserves, self-insurance
Number: 196
Handle: RePEc:glh:wpfacu:196
File-Url: https://growthlab.cid.harvard.edu/files/growthlab/files/2022-10-cid-wp-419-leaning-against-the-wind.pdf
File-Format: application/pdf