IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp2371.html
   My bibliography  Save this paper

Foreign Exchange Intervention with UIP and CIP Deviations: The Case of Small Safe Haven Economies

Author

Listed:
  • Philippe Bacchetta

    (University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR))

  • Kenza Benhima

    (University of Lausanne; Centre for Economic Policy Research (CEPR))

  • Brendan Berthold

    (University of Lausanne)

Abstract

We examine the welfare-based opportunity cost of foreign exchange (FX) intervention when both CIP and UIP deviations are present. We consider a small open economy that receives international capital flows through constrained international financial intermediaries. Deviations from CIP come from limited arbitrage or through a convenience yield, while UIP deviations are also affected by risk. We show that the sign of CIP and UIP deviations may differ for safe haven countries. We find that there may be a benefit, rather than a cost, of FX reserves if international intermediaries value the safe haven properties of a currency more than domestic households. We show that this has been the case for the Swiss franc and the Japanese Yen. We examine the optimal policy of a constrained central bank planner in this context.

Suggested Citation

  • Philippe Bacchetta & Kenza Benhima & Brendan Berthold, 2023. "Foreign Exchange Intervention with UIP and CIP Deviations: The Case of Small Safe Haven Economies," Swiss Finance Institute Research Paper Series 23-71, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2371
    as

    Download full text from publisher

    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4558015
    Download Restriction: no
    ---><---

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp2371. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ridima Mittal (email available below). General contact details of provider: https://edirc.repec.org/data/fameech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.