Leaning-against-the-wind intervention and the “carry-trade” view of the cost of reserves
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Universidad Torcuato Di Tella
Escuela de Gobierno
Escuela de Gobierno
Abstract
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).
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Keywords
Política Monetaria, Monetary policy, Banco Central, Central Bank