Foreign Exchange Interventions in Brazil: Spillover Effects on Asset Prices

Abstract

Borelli de Mello, Alexandre; Gomes Pinto Garcia, Márcio (Advisor); Viana de Carvalho, Carlos (Co-Advisor). Foreign Exchange Interventions in Brazil: Spillover Effects on Asset Prices.

Fx Interventions in Brazil: Revisiting Impacts With a Twofold Approach

“…By the end of the longest estimation window (9 hours) the only effect which can be distinguished from a statistical zero is indeed the effect over the USDBRL. In this way notwithstanding important methodological differences among our work and Mello (2022) we consider that our results converge. Our choice of a daily VAR has the advantage of identifying effects over the USDBRL which potentially last for days but on the other hand is silent about the impact of interventions over asset prices in the minutes and hours which follow an intervention.…”

“…However interventions could have spillovers if they change market expectations about inflation or future monetary policy, for example. Menkhoff, Rieth e Stöhr (2021) finds significant effects for interest rates in Japan and Mello (2022) for stock prices in Brazil albeit in very short time windows. We cannot observe such effects in our exercise.…”

“…Identification of intervention shocks relies on an instrumental variable which we build using the timing of announcements by the BCB. These announcements have been used before by Santos (2021) and Mello (2022). In estimating shocks with this instrument our method makes fairly nonrestrictive assumptions about causality and does not rely lagged endogenous variables as instruments, which have been pervasive in the literature.…”

“…This result could also be related to the fact that interventions shocks in our VAR are exclusively identified with intervention episodes in which the announcements happened on the day before. Mello (2022) for instance finds that interventions are more effective when they take place on the same day as the announcement.…”

“…Our choice of a daily VAR has the advantage of identifying effects over the USDBRL which potentially last for days but on the other hand is silent about the impact of interventions over asset prices in the minutes and hours which follow an intervention. Regarding the effects over the USDBRL itself estimations in Mello (2022) present great heterogeneity over intervention type. The impact of a 1USD Billion intervention ranges from 0 to 1.5 p.p.…”