DP12817 Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles

• Andrea Polo Rodrigo Gonzalez Dmitry Khametshin Jose-Luis Peydro
26 Mar 2018

We show that local policy attenuates global financial cycle (GFC)’s spillovers. We exploit GFC shocks and Brazilian central bank interventions in FX derivatives using threematched 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 oflast 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.