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Leaning-against-the-wind Intervention and the “Carry-Trade” View of the Cost of Reserves

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  • Eduardo Levy Yeyati

    (Universidad Torcuato Di Tella)

  • Juna Francisco Gómez

    (Universidad de Buenos Aires)

Abstract

For a sample of emerging economies, we estimate the quasi-fiscal costs of sterilized foreign exchange interventions as the P&L of an inverse carry trade. We show that these costs can be substantial when intervention has a neo-mercantilist motive (preserving an undervalued currency) or a stabilization motive (appreciating the exchange rate as a nominal anchor) but are rather small when interventions follow a countercyclical, leaning-against-the-wind (LAW) pattern to contain exchange rate volatility. We document that under LAW, central banks outperform a constant size carry trade, as they additionally benefit from buying against cyclical deviations, and that the cost of reserves under the carry-trade view is generally lower than the one obtained from the credit-risk view (which equals the marginal cost to the country´s sovereign spread)

Suggested Citation

  • Eduardo Levy Yeyati & Juna Francisco Gómez, 2022. "Leaning-against-the-wind Intervention and the “Carry-Trade” View of the Cost of Reserves," Working Papers 163, Red Nacional de Investigadores en Economía (RedNIE).
  • Handle: RePEc:aoz:wpaper:163
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    References listed on IDEAS

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    Keywords

    Exchange rates; foreign exchange intervention; international reserves; selfinsurance;
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