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Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework

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Author Info

  • Jaromir Benes
  • Andrew Berg
  • Rafael A Portillo
  • David Vavra

Abstract

We study a wide range of hybrid inflation-targeting (IT) and managed exchange rate regimes, analyzing their implications for inflation, output and the exchange rate in the presence of various domestic and external shocks. To this end, we develop an open economy new-Keynesian model featuring sterilized interventions in the foreign exchange (FX) market as an additional central bank instrument operating alongside the Taylor rule, and affecting the economy through portfolio balance sheet effects in the financial sector. We find that there can be advantages to combining IT with some degree of exchange rate management via FX interventions. Unlike "pure" IT or exchange rate management via interest rates, FX interventions can help insulate the economy against certain shocks, especially shocks to international financial conditions. However, managing the exchange rate through FX interventions may also hinder necessary exchange rate adjustments, e.g., in the presence of terms of trade shocks.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/11.

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Length: 43
Date of creation: 14 Jan 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/11

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Related research

Keywords: Exchange markets; Intervention; Emerging markets; Developing countries; Exchange rate regimes; Monetary policy; Inflation targeting; Economic models; Sterilized FX interventions; new-Keynesian economics.; exchange rate targeting; exchange rate interventions; exchange rates; foreign exchange; nominal exchange rate; exchange rate level; real exchange rate; fixed exchange rate; exchange rate management; fixed exchange rate regime; flexible exchange rate; exchange rate bands; explicit exchange rate; exchange rate fluctuations; exchange rate pass; flexible exchange rate regimes; exchange research; exchange rate risk; exchange rate pegs; currency appreciation; exchange rate developments; real exchange rate � misalignment; flexible � exchange � rate; foreign exchange operations; foreign exchange research; exchange rate movements; real exchange rate fluctuations; nominal exchange rates; exchange rate deviations; exchange rate determination; exchange rate adjustment; exchange rate adjustments; long � term exchange rate; exchange reserves; real exchange rate depreciation; foreign exchange reserves; exchange rate policy; exchange rate expectations;

References

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Citations

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Cited by:
  1. Hernando Vargas Herrera & Andrés González & Diego Rodríguez, 2013. "Foreign Exchange Intervention in Colombia," Borradores de Economia 757, Banco de la Republica de Colombia.
  2. Michal Andrle & Andrew Berg & Enrico Berkes & Rafael A Portillo & Jan Vlcek & R. Armando Morales, 2013. "Money Targeting in a Modern Forecasting and Policy Analysis System: an Application to Kenya," IMF Working Papers 13/239, International Monetary Fund.
  3. Matthew Canzoneri & Robert Cumby, 2014. "Optimal Exchange Intervention in an Inflation Targeting Regime: Some Cautionary Tales," Open Economies Review, Springer, vol. 25(3), pages 429-450, July.
  4. Cukierman, Alex, 2011. "Reflections on the crisis and on its lessons for regulatory reform and for central bank policies," Journal of Financial Stability, Elsevier, vol. 7(1), pages 26-37, January.
  5. Michal Andrle & Andrew Berg & R. Armando Morales & Rafael Portillo & Jan Vlcek, 2013. "Forecasting and Monetary Policy Analysis in Low-Income Countries," IMF Working Papers 13/61, International Monetary Fund.
  6. Emanuel Kohlscheen, 2013. "Long-Run Determinants of the Brazilian Real: a closer look at commodities," Working Papers Series 314, Central Bank of Brazil, Research Department.
  7. Rossini, Renzo & Quispe, Zenón & Serrano, Enrique, 2013. "Foreign Exchange Interventions in Peru," Working Papers 2013-016, Banco Central de Reserva del Perú.
  8. Alexandre Chailloux & Franziska Ohnsorge & David Vavra, 2010. "Euroisation in Serbia," Working Papers 120, European Bank for Reconstruction and Development, Office of the Chief Economist.

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