02106cas a2200253 a 4500 AALejournalIMF021520 230101c9999 xx r poo 0 0eng d 5.00 USD 9781513569406 1018-5941 BD-DhAAL BD-DhAAL Lafarguette, Romain. Foreign Exchange Intervention Rules for Central Banks : A Risk-based Framework / Romain Lafarguette, Romain Veyrune. Washington, D.C. : International Monetary Fund, 2021. 1 online resource (33 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating exchange rate arrangements. The FXI rule addresses a market failure: the absence of hedging solution for tail exchange rate risk in the market (i.e. high volatility). Market impairment or overshoot of exchange rate between two equilibria could generate high volatility and threaten financial stability due to unhedged exposure to exchange rate risk in the economy. The rule uses the concept of Value at Risk (VaR) to define FXI triggers. While it provides to the market a hedge against tail risk, the rule allows the exchange rate to smoothly adjust to new equilibria. In addition, the rule is budget neutral over the medium term, encourages a prudent risk management in the market, and is more resilient to speculative attacks than other rules, such as fixed-volatility rules. The empirical methodology is backtested on Banco Mexico's FXIs data between 2008 and 2016. Mode of access: Internet Veyrune, Romain. IMF Working Papers; Working Paper ; No. 2021/032 Full text available on IMF http://elibrary.imf.org/view/journals/001/2021/032/001.2021.issue-032-en.xml IMF e-Library