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

Author

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  • Jaromir Benes
  • Andrew Berg
  • Rafael 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. To this end, we develop an open economy new–Keynesian model featuring sterilized interventions as an additional central bank instrument operating alongside the Taylor rule and affecting the economy through portfolio balance effects in the financial sector. We find that there can be advantages, from a welfare perspective, 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 interventions may also hinder necessary exchange rate adjustments, e.g., in the presence of terms of trade shocks. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Jaromir Benes & Andrew Berg & Rafael Portillo & David Vavra, 2015. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," Open Economies Review, Springer, vol. 26(1), pages 81-108, February.
    • Handle: RePEc:kap:openec:v:26:y:2015:i:1:p:81-108
    DOI: 10.1007/s11079-014-9320-1
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    More about this item

    Keywords

    Sterilized FX interventions; Balance sheet effects; Monetary policy; Emerging markets; New-Keynesian framework; E52; E58; F31;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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