Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit, and Global Financial Cycles

• Authors: José-Luis Peydró.
• BSE Working Paper: 112198 | May 19
• Keywords: monetary policy , bank credit , foreign exchange , central bank , hedging
• JEL codes: E5, F3, G01, G21, G28
• monetary policy
• bank credit
• foreign exchange
• central bank
• hedging

We show that FX interventions attenuate global financial cycle (GFC)’s spillovers. We exploit GFC shocks and Brazilian central bank interventions in FX derivatives using three matched administrative registers: credit, foreign credit to banks, and employer-employee. After 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 GFC shocks and FX interventions confirms these results and the hedging channel. However, the policy entails fiscal and moral hazard costs.