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We analyze the profitability of FX swaps used by the central bank of Brazil to shed light on the rationale for FX intervention. We find that swaps are profitable in expectation, suggesting that FX intervention is used to stabilize the exchange rate in the face of temporary excessive movements rather than to manipulate it away from fundamental values. In line with this interpretation, we find that the scale of FX intervention responds to the degree of exchange rate misalignment relative to UIP conditions. We also document that intervention is more aggressive when there is less uncertainty about the medium-term level of the exchange rate and when the exchange rate is overvalued rather than undervalued.

Brazil --- Banks and Banking --- Foreign Exchange --- Central Banks and Their Policies --- Interest Rates: Determination, Term Structure, and Effects --- Currency --- Foreign exchange --- Finance --- Exchange rates --- Currency swaps --- Interest rate parity --- Exchange rate forecasting --- Financial services --- Interest rates

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Ex-post deviations from uncovered interest parity (UIP) – realized differences between dollar returns on identical assets of different currencies – equal the real interest differential plus real exchange rate growth. Among industrialized countries, UIP deviations are largely explained by unanticipated real exchange rate growth, but among developing countries, real interest differentials are “where the action is.” This observation is due to the greater variability of inflation in developing countries, but may also stem from higher and more variable risks and capital controls in these countries. Also, among developing countries with moderate inflation, offsetting comovements of real interest differentials and real exchange growth support the sticky-price hypothesis.

Banks and Banking --- Econometrics --- Foreign Exchange --- Interest Rates: Determination, Term Structure, and Effects --- Time-Series Models --- Dynamic Quantile Regressions --- Dynamic Treatment Effect Models --- Diffusion Processes --- Open Economy Macroeconomics --- International Financial Markets --- Currency --- Foreign exchange --- Finance --- Econometrics & economic statistics --- Real exchange rates --- Interest rate parity --- Vector autoregression --- Real interest rates --- Exchange rate adjustments --- Financial services --- Econometric analysis --- Interest rates --- Argentina

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This paper investigates international co-movement in bond yields by testing for uncovered interest parity (UIP). Existing work is supplemented by focusing on long instead of short-term interest rates and by employing exchange rate expectations derived from purchasing power parity (PPP) instead of actual outcomes. Among the major currencies during 1975-97, the paper does not find a further increase in co-movement beyond that associated with the wave of financial market liberalization in the early 1980s. Given the similarity between PPP-based UIP tests and those employing actual exchange rate outcomes, the value added of the former lies mainly with data availability.

Banks and Banking --- Foreign Exchange --- Investments: General --- Interest Rates: Determination, Term Structure, and Effects --- Financial Markets and the Macroeconomy --- Investment --- Capital --- Intangible Capital --- Capacity --- Finance --- Currency --- Foreign exchange --- Macroeconomics --- Long term interest rates --- Exchange rates --- Yield curve --- Interest rate parity --- Return on investment --- Financial services --- National accounts --- Interest rates --- Saving and investment --- United States

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This paper explores how interest rates on domestic financial assets in Mexico are linked to expectations of exchange rate changes and to perceptions about the default risks contained in Mexico’s external debt. It is shown that the interest rate differentials between peso- and U.S. dollar-denominated domestic assets reflected some concerns about the exchange rate policy during the period under study. In addition, the evidence suggests that the interest rate on a U.S. dollar-denominated Mexican domestic asset is linked (i.e., cointegrated) to the yield implicit in the secondary market price for external debt issued by Mexico.

Banks and Banking --- Currency --- Debt Management --- Debt --- Debts, External --- Debts, Public --- Domestic debt --- Exchange rate adjustments --- Exchange rates --- Exports and Imports --- External debt --- Finance --- Financial services --- Foreign Exchange --- Foreign exchange --- Interest rate parity --- Interest rates --- Interest Rates: Determination, Term Structure, and Effects --- International economics --- International Lending and Debt Problems --- Public debt --- Public finance & taxation --- Public Finance --- Sovereign Debt --- Mexico

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This paper tests for uncovered interest parity (UIP) using daily data for 23 developing and developed countries through the crisis-strewn 1990s. We find that UIP works better on average in the 1990s than in previous eras in the sense that the slope coefficient from a regression of exchange rate changes on interest differentials yields a positive coefficient (which is sometimes insignificantly different from unity). UIP works systematically worse for fixed and flexible exchange rate countries than for crisis countries, but we find no significant differences between rich and poor countries.

Banks and Banking --- Foreign Exchange --- Current Account Adjustment --- Short-term Capital Movements --- International Financial Markets --- Interest Rates: Determination, Term Structure, and Effects --- Currency --- Foreign exchange --- Finance --- Interest rate parity --- Exchange rates --- Exchange rate adjustments --- Exchange rate arrangements --- Conventional peg --- Financial services --- Interest rates --- Hong Kong Special Administrative Region, People's Republic of China