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Patterns of Foreign Exchange Intervention under Inflation Targeting

Author

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  • Gustavo Adler
  • Kyun Suk Chang
  • Zijiao Wang

Abstract

The paper documents the use of foreign exchange intervention (FXI) across countries and monetary regimes, with special attention to its use under inflation targeting (IT). We find significant differences between advanced and emerging market economies, with the former group conducting FXI limitedly and broadly symmetrically, while the use of this policy instrument in emerging market countries is pervasive and mostly asymmetric (biased towards purchasing foreign currency, even after taking into account precautionary motives). Within emerging markets, the use of FXI is common both under IT and non-IT regimes. We find no evidence of FXI being used in response to inflation developments, while there is strong evidence that FXI responds to exchange rates, indicating that IT central banks in EMDEs have dual inflation/exchange rate objectives. We also find a higher propensity to overshoot inflation targets in emerging market economies where FXI is more pervasive.

Suggested Citation

  • Gustavo Adler & Kyun Suk Chang & Zijiao Wang, 2020. "Patterns of Foreign Exchange Intervention under Inflation Targeting," IMF Working Papers 2020/069, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2020/069
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    Cited by:

    1. Avril, Pauline & Levieuge, Grégory & Turcu, Camelia, 2025. "Natural disasters and financial stress: can macroprudential regulation tame green swans?," Journal of International Money and Finance, Elsevier, vol. 154(C).
    2. Bui Trung Thanh, 2024. "Foreign exchange interventions and monetary policy: evidence from emerging economies," Review of Economic Perspectives, Sciendo, vol. 24(2-3), pages 71-89.
    3. Eli Direye & Tarron Khemraj, 2022. "Central bank securities and foreign exchange market intervention in a developing economy," Review of Development Economics, Wiley Blackwell, vol. 26(1), pages 280-297, February.
    4. Pierre-Richard Agénor & Luiz Awazu Pereira da Silva, 2021. "Macroeconomic policy under a managed float: a simple integrated framework," BIS Working Papers 964, Bank for International Settlements.
    5. David de Villiers & Hylton Hollander & Dawie van Lill, 2024. "The effectiveness of macroprudential policies in managing extreme capital flow episodes," South African Journal of Economics, Economic Society of South Africa, vol. 92(1), pages 31-46, March.
    6. George Kosgei Kiptum, 2022. "Relationship between Kenya’s economic growth and inflation," SN Business & Economics, Springer, vol. 2(12), pages 1-16, December.
    7. Direye, Eli & Khemraj, Tarron, 2021. "Central bank securities and FX market intervention in a developing economy," MPRA Paper 111533, University Library of Munich, Germany, revised 09 Aug 2021.
    8. Luangaram, Pongsak & Wongpunya, Nipit, 2024. "The effect of trade openness and exchange rate on inflation targeting in Thailand," Journal of Asian Economics, Elsevier, vol. 92(C).
    9. Haryo Kuncoro & Caroline Geetha & Fafurida Fafurida, 2024. "Central Bank Intervention and Exchange Rate Volatility in the Inflation-Targeting Regime," Economic Research Guardian, Mutascu Publishing, vol. 14(1), pages 2-15, June.
    10. Beck, Roland & Berganza, Juan Carlos & Brüggemann, Axel & Cezar, Rafael & Eijking, Carlijn & Eller, Markus & Fuentes, Alberto & Alves, Joel Graça & Kreitz, Lilian & Marsilli, Clement & Moder, Isabella, 2023. "Recent advances in the literature on capital flow management," Occasional Paper Series 317, European Central Bank.

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