Economics Macro Seminar "Foreign Exchange Interventions and Intermediary Constraints"

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 shortlived
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.