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Interventions and Inflation Expectations in an Inflation Targeting Economy

  • Pablo Pincheira

In this paper we explore the role that exchange rate interventions may play in determining inflation expectations in Chile. To that end, we consider a set of nine deciles of inflation expectations coming from the survey of professional forecasters carried out by the Central Bank of Chile. We consider two episodes of preannounced central bank interventions during the sample period 2007–2012. Our results indicate, on the one hand, that the intervention program carried out in 2008 had a significant, but relatively short-lived, impact on the distribution of inflation expectations at long horizons. On the other hand, the intervention carried out in 2011 shows no relevant impact on the distribution of inflation expectations in Chile. A daily analysis using break-even inflation rate as a proxy for inflation expectations is roughly consistent with these results. Our analysis also suggests that the interventions did have an impact on daily exchange rate returns, especially on the day after the announcements of the intervention programs.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 693.

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Date of creation: Jul 2013
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Handle: RePEc:chb:bcchwp:693
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  1. Maurice Obstfeld & Jay C.Shambaugh & Alan M.Taylor, 2003. "The Trilemma in History:Tradeoffs among Exchange Rates, Monetary Policies,and Capital Mobility," DNB Staff Reports (discontinued) 94, Netherlands Central Bank.
  2. Rasmus Fatum & Michael M. Hutchison, 2003. "Is sterilised foreign exchange intervention effective after all? an event study approach," Economic Journal, Royal Economic Society, vol. 113(487), pages 390-411, 04.
  3. Kathryn M.E. Dominguez, 2003. "When Do Central Bank Interventions Influence Intra-Daily and Longer-Term Exchange Rate Movements?," NBER Working Papers 9875, National Bureau of Economic Research, Inc.
  4. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
  5. Juan Carlos Berganza & Carmen Broto, 2011. "Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries," Banco de Espa�a Working Papers 1105, Banco de Espa�a.
  6. Tomas Holub, 2004. "Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience," Research and Policy Notes 2004/01, Czech National Bank, Research Department.
  7. Aizenman, Joshua, 2011. "The Impossible Trinity – from the Policy Trilemma to the Policy Quadrilemma," Santa Cruz Department of Economics, Working Paper Series qt8cq7g4c9, Department of Economics, UC Santa Cruz.
  8. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging Market Countries," NBER Working Papers 7618, National Bureau of Economic Research, Inc.
  9. Carmen Broto, 2012. "The effectiveness of forex interventions in four Latin American countries," Banco de Espa�a Working Papers 1226, Banco de Espa�a.
  10. Gabriela Contreras M. & Alfredo Pistelli M. & Camila Sáez M., 2013. "Efecto de Intervenciones Cambiarias Recientes en Economías Emergentes," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 16(1), pages 122-137, April.
  11. Michael D. Bordo & Owen F. Humpage & Anna J. Schwartz, 2012. "Epilogue: foreign-exchange-market operations in the twenty-first century," Working Paper 1207, Federal Reserve Bank of Cleveland.
  12. José De Gregorio & Andrea Tokman R., 2004. "Flexible Exchange Rate Regime and Forex Interventions: The Chilean Case," Economic Policy Papers Central Bank of Chile 11, Central Bank of Chile.
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