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Foreign Exchange Intervention in Colombia

Author

Listed:
  • Hernando Vargas Herrera

    ()

  • Andrés González

    ()

  • Diego Rodríguez

    ()

Abstract

Banco de la República’s FX intervention policy is described, with a focus on its objectives and main features. Then, based on a survey of the effectiveness of sterilized intervention in Colombia, it is argued that this tool is not useful to cope with the challenges posed by medium term external factors such as quantitative easing in advanced economies, reduced risk premiums in emerging economies or high international commodity prices. The duration of the impact of sterilized intervention on the exchange rate (if any) is much shorter than the effects of those factors. Finally, it is argued that if sterilized FX intervention is effective due to the operation of the portfolio balance channel, it may also have an expansionary effect on credit supply and aggregate demand. In this case, the macroeconomic outcomes of intervention depend on the monetary policy response. This issue is studied with a small open economy DSGE. In general, FX intervention implies a volatility of credit and consumption that is higher than under a more efficient allocation and under alternative monetary regimes without intervention. Furthermore, the more inclined the central bank is to meet an inflation target, the stronger its response to the expansionary effects of the intervention and, consequently, the lower the impact of the intervention on the exchange rate.

Suggested Citation

  • Hernando Vargas Herrera & Andrés González & Diego Rodríguez, 2013. "Foreign Exchange Intervention in Colombia," Borradores de Economia 757, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:757
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    References listed on IDEAS

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    1. 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.
    2. repec:cml:moneta:v:xxxv:y:2013:i:1:p:1-35 is not listed on IDEAS
    3. Juan José Echavarría & Luis Fernando Melo Velandia & Mauricio Villamizar, 2013. "The Impact of Different Types of Foreign Exchange Intervention: An Event Study Approach," Borradores de Economia 784, Banco de la Republica de Colombia.
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    7. Jorge Toro & Juan Manuel Julio, 2005. "Efectividad de la Intervención Discrecional del Banco de la Répública en el Mercado Cambiario," Borradores de Economia 336, Banco de la Republica de Colombia.
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    9. Juan José Echavarría S. & Enrique López E. & Martha Misas A., 2009. "Intervenciones cambiarias y política monetaria en Colombia. Un análisis de VAR estructural," Borradores de Economia 580, Banco de la Republica de Colombia.
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    14. MArcio Gomes Pinto Garcia, 2011. "Can Sterilized FX Purchases under Inflation Targeting be Expansionary?," Textos para discussão 589, Department of Economics PUC-Rio (Brazil).
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    Cited by:

    1. Pierre-Richard Agénor & K. Alper & L. Pereira da Silva, 2015. "External Shocks, Financial Volatility and Reserve Requirements in an Open Economy," Working Papers Series 396, Central Bank of Brazil, Research Department.
    2. Eduardo Levy Yeyati & Jimena Zúñiga, 2015. "Varieties of capital flows: What do we know," Business School Working Papers 2015-01, Universidad Torcuato Di Tella.
    3. Agénor, Pierre-Richard & Alper, Koray & Pereira da Silva, Luiz A., 2014. "Sudden floods, macroprudential regulation and stability in an open economy," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 68-100.
    4. Juan José Echavarría & Luis Fernando Melo & Mauricio Villamizar, 2014. "The Impact of Foreign Exchange Intervention in Colombia. An Event Study Approach," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE, November.

    More about this item

    Keywords

    Monetary Policy; Foreign Exchange Intervention. Classification JEL: F31; F32; F33; E37;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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