This paper investigates extended Taylor rules and foreign exchange intervention functions in large Emerging Markets (EM), measuring the extent to which policies are designed to stabilize output, inflation, exchange rates and accumulate international reserves. We focus on two large emerging markets--India and Brazil. We also consider the impact of greater capital account openness and which rules dominate when policy conflicts arise. We find that output stabilization is a dominant characteristic of interest rate policy in India, as is inflation targeting in Brazil. Both countries actively use intervention policy to achieve exchange rate stabilization and, at times, stabilizing reserves around a target level tied to observable economic fundamentals. Large unpredicted intervention purchases (sales) accommodate low (high) interest rates, suggesting that external operations are subordinate to domestic policy objectives. We extend the work to Chile and China for purposes of comparison. Chile's policy functions are similar to Brazil, while China pursues policies that substantially diverge from other EMs.
This paper evaluates the deviation from covered interest rate parity (CIP) after the great financial crisis. As a new phenomenon, this deviation has been approached both theoretically (violating the no arbitrage condition) and empirically. Through an extensive literature review, this study maps the possible drivers of the deviation and their proxies. We apply the analysis on a set of countries that are not yet explored in the related literature so far, even though represent a significant part of the foreign exchange market. Regarding the results, a significant weight in the financial drivers is obtained. The result claims for a deeper analysis and opens the possibility to evaluate this phenomenon under a new perspective.
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