The effects of non-deliverable forward programs of emerging-market central banks: A synthetic control approach

Since the Global Financial Crisis in 2008, emerging market economies’ central banks have started to use foreign exchange derivative instruments frequently in exchange rate markets to provide a hedging instrument for currency risks and to support market liquidity. In this context, the central banks of three major emerging markets—the Central Bank of Brazil, Central Bank of Mexico, and Central Bank of the Republic of Türkiye—have started to implement non-deliverable forward (NDF) auctions. In this study, the impact of the NDF programs on financial market indicators is examined using a synthetic control method, which controls for the endogeneity and causality problems commonly faced by studies on the effect of central bank exchange market interventions. The empirical findings indicate that the NDF programs of the Central Bank of Brazil and Central Bank of Mexico have a significant impact on the exchange rate level but limited impact on the volatility and no impact on risk reversals. Conversely, the NDF program of the Central Bank of the Republic of Türkiye has a significant downward impact on the implied volatility and risk reversal but no significant impact on the level of the exchange rate. The difference in the effectiveness of similar practices of these three central banks is considered to be related mostly to the size of the programs.