Leaning-against-the-wind intervention and the “carry-trade” view of the cost of reserves
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https://doi.org/10.1007/s11079-022-09689-zMetadata
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Levy Yeyati, Eduardo, and Juan Francisco Gómez. "Leaning-against-the-wind intervention and the “carry-trade” view of the cost of reserves." CID Faculty Working Paper Series 2022.419, Harvard University, Cambridge, MA, October 2022.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).Terms of Use
This article is made available under the terms and conditions applicable to Individual Open Access License Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#IOALCitable link to this page
https://nrs.harvard.edu/URN-3:HUL.INSTREPOS:37374865
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