The Cost of Foreign Exchange Intervention: Concepts and Measurement

Foreign exchange intervention led to a sizable expansion of many central banks’ balance sheets over the last decade, raising questions about the associated fiscal costs. This paper clarifies conceptual issues about how to measure these costs both from an ex-post and an ex-ante (relevant for decision making) perspective, and estimates both marginal and total costs for 73 countries over the period 2002–13. Averaging across various estimation methods, we find ex-ante marginal costs in the inter-quartile range of 2.0–5.5% per year for emerging market economies. Reflecting differences in the accumulation of foreign exchange, ex-ante total costs amounted to 0.2–0.7% of GDP per year in countries with limited intervention, while reaching 0.3–1.2% of GDP per year in heavy-intervening economies. These estimates indicate that fiscal costs of sustained FX intervention are not negligible.