Global liquidity cycles and exchange rate policies in developing and emerging economies : an analysis of the Brazilian experience ; Cycles mondiaux de liquidité et politiques de taux de change dans les économies en developpement et émergents : une analyse de l'expérience brésilienne

This thesis explores the influence of global liquidity cycles (GLC) on the exchange ratedynamics of developing and emerging economies (DEEs) and analyzes the foreign exchangeinterventions that these countries can adopt to offset such influence, focusing onthe Brazilian experience with derivatives.The 21st century has witnessed an evolution in the external fragilities of DEEs. Whilethe accumulation of international reserves has diminished the dangers of currency mismatchesin these economies, it has also increased the attractivity of these economies tonon-resident investments. These investments have a crucial influence on the evolution ofthe exchange rates in these countries. However, the investment decisions of non-residentsremain attached to what is happening in the central economies, generating global liquiditycycles that intercalate periods of financial inflows toward DEEs with the abrupt reversalof these flows. These global liquidity cycles generate Minskyan dynamics in the exchangerates of DEEs, where sharp depreciations follow periods of protracted appreciation of theircurrencies. This thesis provides a review of this literature and then empirical evidence ofsuch asymmetrical behavior.The attention is then shifted to the Brazilian experience. In the 2010s, the BrazilianCentral Bank (BCB) intervened massively with domestic non-deliverable forwards(DNDFS) to offset the reversal of the global financial cycle. An investigation of whythe BCB used these derivatives, how they affected the markets, and the limits of theseinterventions is presented in the fourth chapter. It is argued that the main benefit ofDNDFs is that they preserve the international reserves of the central bank. An empiricalassessment presents evidence that DNDFs strengthened Brazilian hedging markets by allowingthe expansion of market makers’ short dollar positions. DNDFs were also used tolimit excessive currency volatility. However, DNDFs’ losses were costly and increased theinterest-bearing liabilities of the BCB. The higher external policy ...