Foreign Exchange Intervention Rules for Central Banks: A Risk-Based Framework

This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating rate arrangements. The FXI addresses market failure: the absence of hedging solution tail risk (i.e. high volatility). Market impairment or overshoot between two equilibria could generate volatility and threaten due unhedged exposure economy. uses concept Value at Risk (VaR) define triggers. While it provides hedge against risk, allows smoothly adjust new equilibria. In addition, is budget neutral over medium term, encourages prudent management market, more resilient speculative attacks than other rules, such as fixed-volatility rules. empirical methodology backtested on Banco Mexico's FXIs data 2008 2016.