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Choice of foreign exchange intervention and inflation targeting commitment

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  • Choi, Jae Hoon
  • Limnios, Christopher

Abstract

We derive a model in which the decision to intervene in the foreign exchange market becomes an endogenous function of the variance of exogenous shocks and parameters of the model. The central bank evaluates a social welfare loss function under four scenarios including a foreign exchange intervention or non-intervention regimes under both discretionary and commitment type arrangements for administering monetary policy. The model shows that under either a discretionary regime, or a regime characterized as one which commits, the decision to intervene or not to intervene in the forex market depends on an endogenous equation of shallow parameters. Under either intervention or non-intervention, commitment to a policy rule dominates discretion.

Suggested Citation

  • Choi, Jae Hoon & Limnios, Christopher, 2022. "Choice of foreign exchange intervention and inflation targeting commitment," Finance Research Letters, Elsevier, vol. 46(PB).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321003986
    DOI: 10.1016/j.frl.2021.102402
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    References listed on IDEAS

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