BIS Working Paper No 832 Banco de España Working Paper No 2014
We show that FX interventions can be effective, in particular attenuating global financial spillovers. We exploit global financial shocks and Brazilian central bank interventions in FX derivatives using three matched, administrative registers: bank credit (to firms), foreign credit to banks, and employer-employee. After the U.S. Taper Tantrum (followed by Emerging Markets’ FX turbulence), Brazilian banks with more foreign debt cut credit supply, thereby reducing firm-level employment. A subsequent large policy intervention supplying derivatives against FX risks—hedger of last resort—halves the negative effects. A 2008–2015 panel exploiting global FX shocks and local FX interventions confirms the results and hedging channel. However, the FX policy entails fiscal and moral hazard costs.