Abstract: Foreign exchange intervention is an important additional instrument to conventional monetary policy in the form of nominal interest rate changes. An investigation of an optimal simple intervention rule is not complete without a joint optimisation of the monetary policy rule, which is something the literature has been neglecting. To fill this gap, the objective of this paper is to jointly optimise a simple interest rate rule and a simple foreign exchange intervention rule in a canonical New Keynesian small open economy model, taking into account constraints on both policies. I also investigate the use of mandates for intervention, motivated by the fact that a common reason given by central banks to intervene is to contain the volatility of the exchange rate. I find that, in an estimated model, the introduction of intervention leads to welfare gains, even if small, while the use of simple mandates for intervention has welfare costs that are associated with the mandate’s design. Hence, this paper contributes to the literature by highlighting that foreign exchange intervention can be conducted together with monetary policy in a welfare-optimal way that is not only compatible with but also beneficial for inflation targeting.
Open Economy DSGE Modelling with Applications to Emerging Economies. With V. Gabriel, P. Levine and M. Mirfatah in Handbook of Research Methods and Applications in Empirical Macroeconomics (second edition), 2025.
News sentiment and foreign portfolio investment in Brazil. With R. Meurer. International Journal of Finance & Economics, 28:3332-3348, 2023. DOI: doi.org/10.1002/ijfe.2595
Abstract: This paper aims to investigate the influence of news sentiment on foreign portfolio investment, as well as its disaggregated components (equity and debt securities) in Brazil. We construct a news sentiment index, based on the sentiment analysis of news stories published by the Wall Street Journal, from January 1999 to May 2018. The resulting index is consistent with national and international events during the period. There is evidence for the influence of news sentiment on these flows. This influence occurs in both contemporaneous and lagged values, in a way that an improvement in news sentiment leads to an increase in these flows in the next period. Additionally, the volatility of the flows responds asymmetrically to changes in news sentiment.
Deviating from full rationality but not from theoretical consistency: The behavior of inflation expectations in Brazil. With G. T. Lima and R. Meurer. The Quarterly Review of Economics and Finance, 84:492-501, 2022. DOI:
doi.org/10.1016/j.qref.2020.10.002
Abstract: The aim of this paper is to investigate whether inflation expectations in Brazil have characteristics and statistical properties that can be correlated (possibly in a causal way) with observed variables of interest and expectations about them. Our analysis covers the period from December 2001 to August 2018. We test the hypothesis of rational expectations in the formation of inflation expectations by the respondents of the official survey conducted by the Central Bank of Brazil, examining the behavior of their forecast errors. As these errors are biased and can be predicted, we reject the hypothesis of full rationality. We also test models of noisy and sticky information, and we cannot conclude that the deviations from full rationality can be explained by information rigidity. Additionally, with a vector error correction model, we find evidence that the expectations about the related macroeconomic variables respond to each other as predicted by a theoretically-grounded macroeconomic model. Therefore, inflation expectations in Brazil are to an important extent consistent with more general expectations about the future performance of the economy.