Yuan-Han Wang from Penn State University will present "Central Banks Avoid Reporting Losses Through Foreign Exchange Intervention: Evidence and the Possibility of Welfare Gains"

Abstract: Recent studies show that central banks avoid reporting losses, yet how they achieve this is unclear. This paper reveals that central banks avoid reporting losses through foreign exchange interventions (FXI) and demonstrates how such loss-avoiding behavior could lead to welfare gains. I show that central banks perform FXI that increases their profits right before releasing financial statements, pointing to a causal relationship between profit concerns and such interventions. Moreover, the magnitude of the interventions varies predictably with central banks’ incentives to avoid losses. These interventions are welfare-reducing in ordinary circumstances. However, I demonstrate that when the nominal interest rate is at the zero lower bound, central banks’ loss-avoiding behavior can be welfare-increasing; it can serve as a commitment device and provide an optimal escape from the liquidity trap.