The Effectiveness of Futures-based Foreign Exchange Intervention: Comparative Studies of Brazil and India

Syarifuddin, Ferry and Izzulhaq, Syahid (2020): The Effectiveness of Futures-based Foreign Exchange Intervention: Comparative Studies of Brazil and India.

Abstract

This paper examines the effectiveness of futures-based foreign exchange (FX) intervention in determining the exchange rate dynamics and exchange rate pass-through effect. We specifically compare the case of Brazil and India to evaluate and take a lesson learned from those countries’ policy designs and outcomes in utilizing the futures-based FX intervention. By utilizing autoregressive and distributed lag estimations, our empirical results show that the futures-based FX interventions in Brazil are effective in determining the exchange rate movement and reducing exchange rate pass-through, while the futures-based intervention in India is neutral. The results are also confirmed in the robustness checks estimations. The finding implies that the effectiveness of futures-based FX intervention is related to the economic-institutional aspects within these countries, which also suggests that an effective futures-based FX intervention occurs only under specific circumstances.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign Exchange Intervention; Futures-based FX Intervention; Brazil; India
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

References

Adler, G., Lama, R., & Medina, J. P. (2019). Foreign exchange intervention and inflation targeting: The role of credibility. Journal of Economic Dynamics and Control, 106. https://doi.org/10.1016/j.jedc.2019.07.002

Baltagi, B. H. (2008). Econometrics. Verlag Berlin Heidelberg: Springer. https://doi.org/10.1007/978-3-540-76516-5

Benes, J., Berg, A., Portillo, R., & Vavra, D. (2015). Modelling sterilized interventions and balance sheet effects of monetary policy in a new keynesian framework. Open Economies Review, 26(1), 232–264. https://doi.org/10.1007/s11079-014-9320-1

Bhaumik, S. K., & Mukopadhyay, H. (2000). RBI’ s in Foreign Intervention Exchange Market. Economic and Political Weekly, 35(5), 373–376.

Biswal, P. C., & Jain, A. (2019). Should central banks use the currency futures market to manage spot volatility? Evidence from India. Journal of Multinational Financial Management, 100596. https://doi.org/10.1016/j.mulfin.2019.100596

Calvo, G. A., & Reinhart, C. M. (2002). Quarterly Journal of Economics, 2004- . Quarterly Journal of Economics, CXII(August), 1998–2006.

Caporale, G. M., Helmi, M. H., Çatık, A. N., Menla Ali, F., & Akdeniz, C. (2018). Monetary policy rules in emerging countries: Is there an augmented nonlinear taylor rule? Economic Modelling, 72(October 2017), 306–319. https://doi.org/10.1016/j.econmod.2018.02.006

Céspedes, L. F., Chang, R., & Velasco, A. (2004). Balance sheets and exchange rate policy. American Economic Review, 94(4), 1183–1193. https://doi.org/10.1257/0002828042002589

Clarida, R., Galí, J., & Gertler, M. (2001). Optimal monetary policy in open versus closed economies: An integrated approach. American Economic Review, 91(2), 248–252. https://doi.org/10.1257/aer.91.2.248

F.S. Mishkin, & K. Schmidt-Hebbel. (2001). One Decade of Inflation Targeting in the World What Do We Know and What Do We Need to Know. NBER Working Paper Series 8397, National Bureau of Economic Research, Cambridge, 3.

Garcia, C. J., Restrepo, J. E., & Roger, S. (2011). How much should inflation targeters care about the exchange rate? Journal of International Money and Finance, 30(7), 1590–1617. https://doi.org/10.1016/j.jimonfin.2011.06.017

Garcia, M., Medeiros, M., & Santos, F. (2015). Price Discovery in Brazilian FX Markets. Brazilian Review of Econometrics, 35(1), 65–94. https://doi.org/10.12660/bre.v35n12015.46423

Ghosh, A. R., Ostry, J. D., & Chamon, M. (2016). Two targets, two instruments: Monetary and exchange rate policies in emerging market economies. Journal of International Money and Finance, 60, 172–196. https://doi.org/10.1016/j.jimonfin.2015.03.005

Gonzalez, R., Khametshin, D., Peydró, J.-, & Polo, A. (2019). Hedger of last resort: evidence from Brazilian FX interventions, local credit, and global financial cycles. Economics Working Papers, (83).

Gopinath, S. (2010). Over-the-counter derivative markets in India. Financial Stability Review, July(14), 61–69. Retrieved from http://www.centerforfinancialstability.org/fsr/fra_fsr_201007.pdf#page=69

Gujarati, D. N., & Porter, D. C. (2009). Basic Econometrics. (A. E. Hilbert, Ed.) (Fifth Edit). 1221 Avenue of the Americas, New York, NY, 10020: McGraw-Hill/Irwin.

India, R. B. of. (2008). Report of the Internal Working Group on Currency Futures. Mumbai.

International Monetary Fund. (2015). Brazil: Selected Issues; IMF Country Report 15/122; May 12, 2015, (15), 102. Retrieved from https://www.imf.org/external/pubs/cat/longres.aspx?sk=42929.0

International Monetary Fund. (2018). Financial Sector Assessment Program. Financial Sector Assessment Program. https://doi.org/10.1596/978-0-8213-6652-3

Jaffri, A. A. (2010). Exchange rate pass-through to consumer prices in Pakistan: Does misalignment matter? Pakistan Development Review, 49(1), 19–35. https://doi.org/10.30541/v49i1pp.19-35

Kohlscheen, E., & Andrade, S. C. (2014). Official FX interventions through derivatives. Journal of International Money and Finance, 47, 202–216. https://doi.org/10.1016/j.jimonfin.2014.05.023

Laeven, L., & Valencia, F. (2013). Systemic banking crises database. IMF Economic Review,61(2), 225–270. https://doi.org/10.1057/imfer.2013.12

Masih, R., & Masih, A. M. M. (1996). Stock-Watson dynamic OLS (DOLS) and error-correction modelling approaches to estimating long- and short-run elasticities in a demand function: New evidence and methodological implications from an application to the demand for coal in mainland China. Energy Economics, 18(4), 315–334. https://doi.org/10.1016/S0140-9883(96)00016-3

Masson, P. R., Savastano, M. A., & Sharma, S. (1997). The Scope for Inflation Targeting in Developing Countries (IMF Working Paper No. WP/97/130).

McCallum, B. T. (2007). INFLATION TARGETING FOR THE UNITED STATES? Cato Journal, 27(2), 261–271.

Menkhoff, L. (2013). Foreign exchange intervention in emerging markets: A survey of empirical studies. World Economy, 36(9), 1187–1208. https://doi.org/10.1111/twec.12027

Mihaljek, D. (2005). Survey of central banks’ views on effects of intervention (BIS Papers No. 24). BIS Papers. Mishkin, F. S., & Savastano, M. A. (2001). Monetary policy strategies for Latin America. Journal of Development Economics, 66(2), 415–444. https://doi.org/10.1016/S0304-3878(01)00169-9

Mohanty, M. S., & Klau, M. (2010). Monetary Policy Rules in Emerging Market Economies : Issues and Evidence. (L. R.J. & de S. L.V., Eds.), Monetary Policy and Macroeconomic Stabilization in Latin America. Berlin, Heidelberg: Springer. https://doi.org/10.1007/3-540-28201-7_13

Nedeljkovic, M., & Saborowski, C. (2019). The Relative Effectiveness of Spot and Derivatives-Based Intervention. Journal of Money, Credit and Banking, 51(6), 1455–1490. https://doi.org/10.1111/jmcb.12594

Oliveira, F. N. (2020). New evidence on the effectiveness of interventions in the foreign exchange market in Brazil. Brazilian Review of Finance, 18(2), 29. https://doi.org/10.12660/rbfin.v18n2.2020.80115

Pesaran, M. H., & Shin, Y. (1999). An Autoregressive Distributed-Lag Modelling Approach to Cointegration Analysis. In S. Strom (Ed.), Econometrics and Economic Theory in the 20th Century (pp. 371–413). Cambridge: Cambridge University Press. https://doi.org/10.1017/CCOL521633230.011

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616

Phillips, P. C. B. (1995). Fully Modified Least Squares and Vector Autoregression. Econometrica, 63(5), 1023–1078. Richard, F. (2016). Econometric modeling of exchange rate determinants by market classification: an empirical analysis of japan and south Korea using the sticky-price monetary theory. Economic Policy, (October), 0–33. https://doi.org/10.1227/01.NEU.0000349921.14519.2A

Taylor, J. B. (2001). The role of the exchange rate in monetary-policy rules. American Economic Review, 91(2), 263–267. https://doi.org/10.1257/aer.91.2.263

Tripathy, R. (2013). Intervention in foreign exchange markets: the approach of the Reserve Bank of India. BIS Paper, (73), 169–176. Upper, C., & Valli, M. (2016). Emerging derivatives markets? BIS Quarterly Review, (December), 67–80.

Xu, J., Du, Q., & Wang, Y. (2019). Two-sided heterogeneity and exchange rate pass-through. Economics Letters, 183, 108534. https://doi.org/10.1016/j.econlet.2019.108534