Abstract: We study the impact of foreign exchange interventions during periods of tight credit
constraints. Expanding on the Gabaix and Maggiori (2015) model, we predict
that long-lived spot interventions have larger effects on exchange rates than short lived swaps, unanticipated interventions are more impactful, and tighter credit
constraints amplify effects. Using high-frequency data on Brazilian Central Bank
interventions from 1999 to 2023, we find that unanticipated spot sales of USD
reserves lead to significant domestic currency appreciation and reduced covered
interest parity deviations. Spot interventions outperform swaps, especially when
global intermediaries are constrained, and enhance market efficiency by lowering
USD borrowing costs.
Xiaoliang Wang, Hong Kong University of Science & Technology
Mengbo Zhang, Shanghai University of Finance and Economics
Abstract: In this paper, we investigate the role of currency dealers in the global transmissionof US (un)conventional monetary policy. We develop a two-country New Keynesianmodel with local banks and global currency dealers in a segmented international financialmarket, both of which are financially constrained. We calibrate the model bytargeting estimates from a structural vector autoregression. Our quantitative analysisindicates that currency dealers’ constraint is crucial for the transmission and effectivenessof quantitative easing in an open economy. The calibrated model also rationalizesthe major exchange rate puzzles, particularly the downward term structure of currencycarry trade risk premia.
Abstract: I develop a theory of the optimal currency choice for invoicing goods for international trade in the presence of imperfect financial hedging of currency risk. I demonstrate that the classic irrelevance result—that the cost of financial hedging does not impact the choice of currency invoicing—rests on the assumption that sellers set prices ex-ante and commit to fulfill any order size ex-post. I refer to this set-up as sticky prices and flexible quantities. I show that when quantities are also sticky, in the sense that the order quantity is pre-specified, then financial hedging affects the optimal currency of invoicing choice. My theory of jointly sticky prices and quantities incorporates financial frictions into existing theories of real hedging. I show that this financial hedging channel is quantitatively relevant and that it generates a feedback between macroprudential policies that affect the cost of hedging, such as capital controls and the optimal currency of invoicing. I demonstrate that macroprudential policies can affect the expenditure switching properties of the exchange rate by inducing a different choice of optimal currency of invoicing.
Discussant: Omar Barbiero, Federal Reserve Bank of Boston
