Introduction -- The foreign exchange intervention -- The bid-ask spread: the market microstructure perspective -- The empirical decomposition of the bid-ask spread for exchange rates -- Government intervention on the spread -- References -- Appendices.

This paper uses a microstructure approach to analyze the effectiveness of capital controls introduced in Brazil to counter an appreciation of the Real. Based on a rich data set from the Brazilian foreign exchange market, we estimate a reduced-form VAR to characterize the interaction of the...