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Systematic Foreign Exchange Intervention and Macroeconomic Stability: A Bayesian DSGE Approach

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  • Mitsuru Katagiri

    (Hosei University)

Abstract

This study quantitatively assesses the role of foreign exchange interventions (FXIs) by introducing a systematic FXI policy that follows a feedback rule responding to nominal FX rates into a small open-economy DSGE model. A quantitative analysis using Vietnamese data reveals that while the systematic FXI policy amplifies the effects of productivity shocks due to the lack of FX flexibility, it contributes to macroeconomic stability overall by insulating an economy from external shocks. The real FX rate, which is modeled as a non-stationary variable on the balanced-growth path, is mainly accounted for by productivity shocks, in contrast with the exchange rate disconnect but consistent with the Balassa–Samuelson relationship.

Suggested Citation

  • Mitsuru Katagiri, 2024. "Systematic Foreign Exchange Intervention and Macroeconomic Stability: A Bayesian DSGE Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 20(2), pages 291-342, April.
    • Handle: RePEc:ijc:ijcjou:y:2024:q:2:a:7
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    References listed on IDEAS

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    1. Sebastián Fanelli & Ludwig Straub, 2021. "A Theory of Foreign Exchange Interventions [The Cost of Foreign Exchange Intervention: Concepts and Measurement]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(6), pages 2857-2885.
    2. Fratzscher, Marcel & Gloede, Oliver & Menkhoff, Lukas & Sarno, Lucio & Stöhr, Tobias, 2019. "When Is Foreign Exchange Intervention Effective? Evidence from 33 Countries," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 0(1), pages 132-156.
    3. Olivier Blanchard & Gustavo Adler & Irineu de Carvalho Filho, 2015. "Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?," Working Paper Series WP15-18, Peterson Institute for International Economics.
    4. Mitsuru Katagiri & Koji Takahashi, 2017. "Do Term Premiums Matter? Transmission via Exchange Rate Dynamics," Bank of Japan Working Paper Series 17-E-7, Bank of Japan.
    5. Devereux, Michael B. & Yetman, James, 2014. "Globalisation, pass-through and the optimal policy response to exchange rates," Journal of International Money and Finance, Elsevier, vol. 49(PA), pages 104-128.
    6. Linde, Jesper & Adrian, Tobias & Erceg, Christopher J. & Zabczyk, Pawel & Zhou, Jianping, 2020. "A Quantitative Model for the Integrated Policy Framework," CEPR Discussion Papers 15065, C.E.P.R. Discussion Papers.
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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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