› › Is Foreign Exchange Market Intervention An Alternative To Monetary Policy


Foreign Exchange Intervention as a Monetary Policy Instrument

Author : Felix Hüfner

Publisher : Springer Science & Business Media

Page : 180 pages

File Size : 10,73 MB

Release : 2012-12-06

Category : Business & Economics

ISBN : 3790826723

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Book Description

Foreign exchange intervention is frequently being used by central banks in countries which have a floating exchange rate. Most theoretical monetary policy models, however, do not take this phenomenon into account. This book contributes to close this gap between theory and practice by interpreting foreign exchange intervention as an additional monetary policy instrument for inflation targeting central banks. In-depth empirical analyses of the foreign exchange operations and interest rate policy of five inflation targeting countries (Australia, Canada, New Zealand, Sweden and the United Kingdom) demonstrate how foreign exchange intervention is used in practice.



Foreign Exchange Intervention Rules for Central Banks: A Risk-based Framework

Author : Romain Lafarguette

Publisher : International Monetary Fund

Page : 33 pages

File Size : 37,36 MB

Release : 2021-02-12

Category : Business & Economics

ISBN : 1513569406

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Book Description

This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating exchange rate arrangements. The FXI rule addresses a market failure: the absence of hedging solution for tail exchange rate risk in the market (i.e. high volatility). Market impairment or overshoot of exchange rate between two equilibria could generate high volatility and threaten financial stability due to unhedged exposure to exchange rate risk in the economy. The rule uses the concept of Value at Risk (VaR) to define FXI triggers. While it provides to the market a hedge against tail risk, the rule allows the exchange rate to smoothly adjust to new equilibria. In addition, the rule is budget neutral over the medium term, encourages a prudent risk management in the market, and is more resilient to speculative attacks than other rules, such as fixed-volatility rules. The empirical methodology is backtested on Banco Mexico’s FXIs data between 2008 and 2016.





The Cost of Foreign Exchange Intervention

Author : Gustavo Adler

Publisher : International Monetary Fund

Page : 37 pages

File Size : 35,70 MB

Release : 2016-04-12

Category : Business & Economics

ISBN : 148433230X

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Book Description

The accumulation of large foreign asset positions by many central banks through sustained foreign exchange (FX) intervention has raised questions about its associated fiscal costs. This paper clarifies conceptual issues regarding 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. We find ex-ante marginal costs for the median emerging market economy (EME) in the inter-quartile range of 2-5.5 percent per year; while ex-ante total costs (of sustaining FX positions) in the range of 0.2-0.7 percent of GDP per year for light interveners and 0.3-1.2 percent of GDP per year for heavy interveners. These estimates indicate that fiscal costs of sustained FX intervention (via expanding central bank balance sheets) are not negligible.





From Fixed to Float

Author : Mrs.Gilda Fernandez

Publisher : International Monetary Fund

Page : 40 pages

File Size : 39,56 MB

Release : 2004-07-01

Category : Business & Economics

ISBN : 1451854935

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Book Description

This paper identifies the institutional and operational requisites for transitions to floating exchange rate regimes. In particular, it explores key issues underlying the transition, including developing a deep and liquid foreign exchange market, formulating intervention policies consistent with the new regime, establishing an alternative nominal anchor in the context of a new monetary policy framework, and building the capacity of market participants to manage exchange rate risks and of supervisory authorities to regulate and monitor them. It also assesses the factors that influence the pace of exit and the appropriate sequencing of exchange rate flexibility and capital account liberalization.



Foreign Exchange Intervention and the Dutch Disease

Author : Julia Faltermeier

Publisher : International Monetary Fund

Page : 36 pages

File Size : 10,27 MB

Release : 2017-03-27

Category : Business & Economics

ISBN : 147558931X

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Book Description

We study the optimal foreign exchange (FX) intervention policy in response to a positive terms of trade shock and associated Dutch disease episode in a small open economy model. We find that during a Dutch disease episode tradable production drops below the socially optimal level, resulting in lower welfare under learningby- doing (LBD) externalities. FX reserves accumulation improves welfare by preventing a large appreciation of the real exchange rate and by inducing an efficient reallocation between the tradable and non-tradable sectors. For an empirically plausible parametrization of LBD externalities, the model predicts that in response to a 10 percent increase in commodity prices FX reserves should increase by 1.5 percent of GDP. We also find that the welfare gains from optimally using FX reserves are twice as high as the gains from relying only on monetary policy. These results suggest that FX intervention is a beneficial policy to counteract the loss of competitiveness during a Dutch disease episode.



Foreign Exchange Intervention under Policy Uncertainty

Author : Gustavo Adler

Publisher : International Monetary Fund

Page : 40 pages

File Size : 22,73 MB

Release : 2016-03-17

Category : Business & Economics

ISBN : 1475520417

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Book Description

We study the use of foreign exchange (FX) intervention as an additional policy instrument in an environment with learning, where agents infer the central bank policy rules from its policy actions. Under full information, a central bank focused on stabilizing output and inflation can achieve better outcomes by using FX intervention as an additional policy tool. Under policy uncertainty, where agents perceive that monetary policy may also have exchange rate stabilization goals, the use of FX intervention entails a trade-off, reducing output volatility while increasing inflation volatility. While having an additional policy tool is always beneficial, we find that the optimal magnitude of intervention is higher in monetary policy regimes with lower uncertainty. These results indicate that the benefits of using FX intervention as an additional stabilization tool are greater in regimes where monetary policy is credibly focused on output and inflation stabilization.



Moving to a Flexible Exchange Rate

Author : Rupa Duttagupta

Publisher : International Monetary Fund

Page : 36 pages

File Size : 11,3 MB

Release : 2005

Category : Business & Economics

ISBN :

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Book Description

A growing number of countries are adopting flexible exchange rate regimes because flexibility offers more protection against external shocks and greater monetary independence. Other countries have made the transition under disorderly conditions, with the sharp depreciation of their currency during a crisis. Regardless of the reason for adopting a flexible exchange rate, a successful transition depends on the effective management of a number of institutional and operational issues. The authors of this Economic Issue describe the necessary ingredients for moving to a flexible regime, as well as the optimal pace and sequencing under different conditions.