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Foreign exchange reserve accumulation in emerging markets: what are the domestic implications?

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  • M S Mohanty
  • Philip Turner

Abstract

This paper discusses some of the domestic implications of the recent large-scale use of foreign exchange intervention by emerging market economies to resist currency appreciation. Over the past five years, many countries have adopted an accommodating monetary policy while intervening. Despite the prolonged period of low interest rates that resulted, various other forces have kept inflation under control and so eased one policy dilemma for central banks. Nevertheless, large and prolonged reserve accumulation can still create risks other than near-term inflation. These include=high intervention costs; monetary imbalances; overheated credit and asset markets; and very liquid and perhaps distorted banking systems.

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Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2006)
Issue (Month): (September)
Pages:

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Handle: RePEc:bis:bisqtr:0609f

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  1. M S Mohanty & Philip Turner, 2005. "Intervention: what are the domestic consequences?," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 56-81 Bank for International Settlements.
  2. Rodrik, Dani, 2006. "The Social Cost of Foreign Exchange Reserves," CEPR Discussion Papers 5483, C.E.P.R. Discussion Papers.
  3. Philip D Wooldridge, 2006. "The changing composition of official reserves," BIS Quarterly Review, Bank for International Settlements, September.
  4. Reinhart, Carmen & Reinhart, Vincent, 1998. "“Some Lessons for Policy Makers Who Deal with the Mixed Blessing of Capital Inflows,”," MPRA Paper 7123, University Library of Munich, Germany.
  5. Robert N McCauley, 2003. "Unifying government bond markets in East Asia," BIS Quarterly Review, Bank for International Settlements, December.
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