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Accumulating Foreign Reserves Under Floating Exchange Rates

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  • Fernando M. Gonçalves

Abstract

Official accumulation of foreign reserves may be perceived as interventions to influence the exchange rate, undermining the credibility of floating exchange rates and inflation targets. This paper develops a theoretical framework to study the interaction between reserve accumulation and monetary policy. The model uncovers a trade-off between the speed of reserve accumulation and anti-inflationary credibility. Under reasonable assumptions, delegation of intervention and monetary policy decisions to separate government agencies allows faster reserve accumulation, while centralization of these decisions results in a more stable economy. The analysis underscores the importance of rather overlooked institutional features of policymaking in open economies.

Suggested Citation

  • Fernando M. Gonçalves, 2008. "Accumulating Foreign Reserves Under Floating Exchange Rates," IMF Working Papers 08/96, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/96
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    References listed on IDEAS

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    10. Schorfheide, Frank, 2000. "Forecasting Economic Time Series," Econometric Theory, Cambridge University Press, vol. 16(03), pages 441-450, June.
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    12. Paul Moser-Boehm, 2005. "Governance aspects of foreign exchange interventions," BIS Papers chapters,in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 19-39 Bank for International Settlements.
    13. Romain Ranciere & Olivier D Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries; Formulas and Applications," IMF Working Papers 06/229, International Monetary Fund.
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