Author : Romain Lafarguette
Release : 2021-02-12
Genre : Business & Economics
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Book Rating : 406/5 ( reviews)

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Foreign Exchange Intervention Rules for Central Banks: A Risk-based Framework - read free eBook in online reader or directly download on the web page. Select files or add your book in reader. Download and read online ebook Foreign Exchange Intervention Rules for Central Banks: A Risk-based Framework write by Romain Lafarguette. This book was released on 2021-02-12. Foreign Exchange Intervention Rules for Central Banks: A Risk-based Framework available in PDF, EPUB and Kindle. This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating exchange rate arrangements. The FXI rule addresses a market failure: the absence of hedging solution for tail exchange rate risk in the market (i.e. high volatility). Market impairment or overshoot of exchange rate between two equilibria could generate high volatility and threaten financial stability due to unhedged exposure to exchange rate risk in the economy. The rule uses the concept of Value at Risk (VaR) to define FXI triggers. While it provides to the market a hedge against tail risk, the rule allows the exchange rate to smoothly adjust to new equilibria. In addition, the rule is budget neutral over the medium term, encourages a prudent risk management in the market, and is more resilient to speculative attacks than other rules, such as fixed-volatility rules. The empirical methodology is backtested on Banco Mexico’s FXIs data between 2008 and 2016.