Working Paper

The Microstructure of Exchange Rate Management: FX Intervention and Capital Controls in Brazil

Authors

  • Steven Furnagiev
  • Stefan Reitz
  • Calebe de Roure
Publication Date

This paper uses a microstructure approach to analyze the effectiveness of capital controls introduced in Brazil to counter an appreciation of the Real. Based on a rich data set from the Brazilian foreign exchange market, we estimate a reduced-form VAR to characterize the interaction of the central bank, financial and commercial customers in times of regulatory policy measures. Controlling for regular FX interventions we find that capital controls change market participants' behavior. Referring to thesource of order flow, we find no evidence that the appreciation of the Real is driven by financial customers’ activity. Instead, commercial customers seem to be a primary driver of the Real within our model. To the extent that capital controls influence commercial customers' order flow, this is the likely channel policy makers use to respond to a perceived loss of international competitiveness.

Info

JEL Classification
E58, F31, G14, G15

Key Words

  • Foreign Exchange
  • Macroprudential Policies
  • market microstructure
  • Sterilized Intervention