| Abstract: |
Many emerging market economies have relied on foreign exchange intervention
(FXI) in response to gross capital inflows. In this paper, we study whether
FXI has been an effective tool to dampen the effects of these inflows on the
exchange rate. To deal with endogeneity issues, we look at the response of
different countries to plausibly exogenous gross inflows, and explore the
cross country variation of FXI and exchange rate responses. Consistent with
the portfolio balance channel, we find that larger FXI leads to less exchange
rate appreciation in response to gross inflows. |