20180619-法国巴黎银行-EM_Technical_note__Is_there_an_optimal_FX_intervention_strategy__The_answer_is_no._13页_619kb

EM/LATAM Strategy Summary

Core Content

This document, authored by Banco BNP Paribas Brasil S.A., presents a formal framework for evaluating the efficiency of foreign exchange (FX) intervention strategies in emerging markets (EMs). The analysis focuses on the three main transmission channels of FX intervention—portfolio-balance, signalling, and order-flow—and explores the effectiveness of rules-based versus discretionary intervention approaches. The document concludes that there is no dominant FX intervention strategy, and that the choice of strategy depends on the nature of the economic shocks and the capital account openness of the country.

Main Viewpoints

1. FX Intervention Channels

• Portfolio-balance channel: In economies with limited capital account openness, central banks can influence the exchange rate by altering the supply and demand for domestic and foreign assets. This is particularly relevant in countries with large FX interventions, such as Argentina.

• Signalling channel: Central banks can influence expectations about future policy, which in turn affects FX rates. However, the effectiveness of this channel is limited unless the central bank is perceived as credible and transparent. In many cases, interventions are not publicly disclosed, which reduces their impact.

• Order-flow channel: This relies on the central bank having superior information about market activity. It is more effective when the central bank's intervention is large enough relative to overall market turnover. This channel is less common due to the difficulty in maintaining such an information advantage.

2. Nature of Shocks and Intervention Applicability

• Temporary shocks: These may justify FX intervention if they cause excessive exchange rate fluctuations without affecting macroeconomic fundamentals. Intervention can help stabilize the rate and prevent speculative attacks.

• Permanent shocks: These, such as changes in domestic monetary conditions or terms of trade, lead to long-term FX rate adjustments. Intervention is generally not advisable unless the rate overshoots and becomes disruptive.

• Example: The Argentine Central Bank (BCRA) made the mistake of intervening in response to a perceived permanent shift in global and EM risk pricing, which led to high international reserve costs and limited effectiveness.

3. Rules-based vs Discretionary Intervention

• Rules-based intervention may be appropriate in the short term, especially in specific circumstances like Brazil’s 2001 and 2013 swap programs. However, over time, central banks tend to abandon or modify such rules in favor of more discretion.

• Discretionary intervention often shows superior results, but it is not a one-size-fits-all solution. It introduces more volatility in the FX rate but can reduce speculative activity and the costs of holding reserves.

• The document emphasizes that discretion is essential for central banks to adapt to changing market conditions and avoid being exploited by speculators.

4. Effects of FX Intervention

• Smoothing FX rate volatility can reduce speculative risks but may increase the volatility of international reserves and intervention costs.
• Interest rate shocks are particularly costly to offset through FX intervention, as they create a strong positive correlation between reserve levels and their carrying costs.
• Transparent intervention is more effective in influencing market expectations and FX rates, while undisclosed intervention is less likely to be impactful.

Key Information

• Objective: The document aims to provide a formal analytical framework to test the efficiency of FX intervention strategies.
• Model Basis: The analysis is based on the BIS Paper No. 499, which introduces a model with three types of agents (fundamentalists, speculators, and the central bank) and two types of intervention strategies (lean against the wind and systematic intervention).
• Empirical Findings: There is no single optimal intervention strategy. The effectiveness of intervention depends on the degree of capital account openness and the degree of exchange rate misalignment.
• Conclusion: No dominant intervention policy exists. While intervention can reduce FX volatility, it may lead to higher reserve volatility and costs. These costs are especially high when FX movements are driven by interest rate differentials.

Summary of Intervention Outcomes

Final Conclusion

There is no optimal FX intervention strategy. The effectiveness of intervention is contingent on the type of shock, capital account openness, and exchange rate misalignment. While rules-based intervention may be useful in short-term scenarios, discretionary intervention is often more effective, especially when the central bank has the flexibility to adapt to changing conditions. However, discretion comes with trade-offs, including increased FX rate volatility and potential losses from speculative activity. Thus, central banks must balance these factors when deciding on FX intervention policies.