This study examines the different motives of central bank FX market intervention. Particular attention is given to the financial stability motive by considering periods of capital outflows and residents’ cross-border exposures. The following questions are raised: Do central banks explicitly account for cross-border exposures or linkages of domestic residents in their conduct of FX market intervention? Do these exposures increase the central bank’s propensity to intervene during capital outflow episodes? Analysis is conducted by estimating a central bank FX intervention reaction function using a panel of six Asian emerging market economies with floating or managed float exchange rate regimes for the period 2005-2016. This paper contributes to the literature by including measures of cross-border exposures and capital outflows in an empirical estimation of a central bank’s FX intervention reaction function, which have not been explicitly considered by past studies. Results reveal that apart from the traditional motives of FX market intervention (i.e., lean against the wind, reserves accumulation, and to support export competitiveness), financial stability considerations appear to influence the propensity of central banks to intervene in the FX market. In particular, in countries with higher cross-border exposures, the propensity of central banks to intervene during capital outflow episodes increases. There is likewise some evidence that central banks may have a higher propensity to intervene, whether there is a capital outflow episode or none, when residents have higher cross-border exposures.
