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Is Central Bank Intervention Effective Under Inflation Targeting Regimes? the Case of Colombia

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  • Herman Kamil
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    Abstract

    Policymakers in many emerging markets are attempting to resist currency appreciation while simultaneously meeting targets for inflation. Using the recent experience of Colombia between 2004 and 2007, this paper examines the effectiveness of the Central Bank''s intervention in stemming domestic currency appreciation under an inflation targeting regime. The results indicate that exchange rate intervention was effective during 2004-2006, when foreign currency purchases were undertaken during a period of monetary easing. During 2007, on the other hand, intervention was ineffective in reversing or slowing down domestic currency appreciation, as large-scale intervention became incompatible with meeting the inflation target in an overheating economy. Currency derivative markets-which have grown in depth and sophistication-played a key role in blunting the effectiveness of intervention.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/88.

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    Length: 42
    Date of creation: 01 Apr 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/88

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    Keywords: Central bank role; Inflation targeting; Emerging markets; Exchange rate management; Exchange rate appreciation; exchange rate; foreign exchange; inflation; monetary policy; exchange rates; foreign currency; foreign exchange market; currency appreciation; nominal exchange rate; exchange rate volatility; inflation target; exchange market intervention; daily exchange rate; exchange rate level; exchange rate movements; foreign exchange rate; exchange rate changes; exchange rate policy; high inflation; spot exchange rate; real exchange rate; exchange rate dynamics; price stability; exchange rate regime; inflation targeting regime; exchange rate intervention; inflationary pressures; real exchange rates; exchange markets; inflation rates; exchange purchases; monetary base; foreign exchange sales; real exchange rate appreciation; foreign exchange purchases; inflation objective; exchange rate levels; exchange options; foreign exchange markets; foreign ? exchange; exchange sales; exchange rate policies; dollar exchange rate; exchange rate determination; foreign exchange operations; fixed exchange rate; exchange rate movement; flexible exchange rates; exchange rate change; currency depreciation; inflationary expectations; inflation data; exchange rate flexibility; inflation targeting framework; fixed exchange rate regime; home currency; exchange rate data; exchange rate fluctuations; exchange rate adjustment; actual inflation; nominal interest rates; exchange operations; floating exchange rate; flexible exchange rate; foreign exchange transactions; exchange rate bands; exchange rate transactions; increase in inflation; exchange transactions; flexible exchange rate regime; printing money; currency markets; official exchange rate; terms of trade;

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    22. Kearns, Jonathan & Rigobon, Roberto, 2005. "Identifying the efficacy of central bank interventions: evidence from Australia and Japan," Journal of International Economics, Elsevier, vol. 66(1), pages 31-48, May.
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    24. Hali Edison & Paul Cashin & Hong Liang, 2006. "Foreign exchange intervention and the Australian dollar: has it mattered?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(2), pages 155-171.
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    28. Robert Lavigne, 2008. "Sterilized Intervention in Emerging-Market Economies: Trends, Costs, and Risks," Discussion Papers 08-4, Bank of Canada.
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    Citations

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    Cited by:
    1. Benedict J. Clements & Herman Kamil, 2009. "Are Capital Controls Effective in the 21st Century? the Recent Experience of Colombia," IMF Working Papers 09/30, International Monetary Fund.
    2. Alberto Humala & Gabriel Rodriguez, 2010. "Foreign exchange intervention and exchange rate volatility in Peru," Applied Economics Letters, Taylor & Francis Journals, vol. 17(15), pages 1485-1491.
    3. Renee Fry-McKibbin & Sumila Wanaguru, 2012. "Currency Intervention: A Case Study of an Emerging Market," CAMA Working Papers 2012-32, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    4. Ramon Moreno, 2011. "Foreign exchange market intervention in EMEs: implications for central banks," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 65-86 Bank for International Settlements.
    5. Juan Carlos Berganza & Carmen Broto, 2011. "Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries," Banco de Espa�a Working Papers 1105, Banco de Espa�a.
    6. Carmen Broto, 2012. "The effectiveness of forex interventions in four Latin American countries," Banco de Espa�a Working Papers 1226, Banco de Espa�a.
    7. Isabel K. Yan & Michael Kumhof, 2009. "Balance of Payments Anti-Crises," IMF Working Papers 09/134, International Monetary Fund.
    8. Bank for International Settlements, 2008. "Monetary and financial stability implications of capital flows in Latin America and the Caribbean," BIS Papers, Bank for International Settlements, number 43, July.

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