Abstract
This thesis contains three interconnected chapters that explore foreign exchange intervention
policy.
Chapter 1 motivates the topic, highlighting the importance of this type of policy, which
can be compatible with inflation targeting, as an additional instrument to monetary
policy. The chapter also presents a first estimation of Taylor-type foreign exchange
intervention rules using Brazilian data. Brazil adopted an inflation-targeting regime
with floating exchange rates in 1999 and has been using FX intervention since then.
The results suggest that the Central Bank of Brazil leans against the wind following a
depreciation of the domestic currency.
Chapter 2, then, expands the analysis with a microfounded model and the Bayesian
estimation of both interest rate and foreign exchange intervention rules. It provides
more evidence that the Brazilian monetary authority, in addition to having an inflationtargeting
behaviour, also leans against the wind in response to currency depreciation.
The results also suggest that this happens in response to any shock that causes a
depreciation, not only to foreign shocks.
Finally, Chapter 3 uses the model estimated in Chapter 2 to jointly optimise a simple
monetary policy rule and a simple foreign exchange intervention rule, which is the main
contribution of this thesis. The results show that the introduction of the intervention
policy is welfare-improving when compared to the case in which only monetary policy
is available to the central bank. The adoption of simple mandates that penalise the
variance of inflation, output, and depreciation has welfare costs that depend on the
mandate’s design.