Foreign exchange intervention in a small open economy with a long term peg
Central banks usually intervene in order to calm disorderly market conditions, fix exchange rate misalignments, stabilise erratic short-term exchange rate fluctuations, or quell the excess demand/supply of FX. Under a floating regime, the size and timing of intervention are critical policy decisions. But, in an economy with a fixed exchange rate – such as Barbados – FX intervention tends to be endogenous i.e., it is the FX demand and supply conditions that dictate both the timing and amount of intervention. Against this backdrop, this paper developed a model to investigate how FX market conditions dictate intervention in Barbados, small open economy which has been pegged to the US dollar for over 30 years. Results suggest that market frictions, oil prices and oil price shocks all reduce net purchases of FX, while the seasonal highs in tourism and the differential between domestic and foreign interest rates both increase net purchases.
Volume (Year): 32 (2012)
Issue (Month): 3 ()
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