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Interdependencies between Monetary policy and Foreign-Exchange Intervention under Inflation Targeting: The Case of Brazil and the Czech Republic


  • Luiz de Mello
  • Diego Moccero
  • Jean-Yves Gnabo


The bulk of recent literature on foreign-exchange interventions has overlooked the potential interdependencies that may exist between these operations and the conduct of monetary policy. This is the case even under inflation targeting and especially in emerging-market economies, because central banks often explicitly reserve the right to intervene to calm disorderly markets and to accumulate foreign reserves, and when the exchange rate is perceived as out of step with fundamentals. This paper uses a friction model to estimate intervention reaction functions and the associated marginal effects for Brazil and the Czech Republic since adoption of inflation targeting in these countries in 1999 and 1998, respectively. The main findings are that: i) in both countries interventions occur predominantly to reduce exchange-rate volatility, while in Brazil the central bank also reacts to exchange-rate deviations from medium-term trends; ii) there are strong, asymmetric threshold effects in the reaction functions, and interventions are more likely and of higher magnitudes when they are carried out to depreciate than to appreciate the domestic currency; and iii) interventions seem to take place independently of contemporaneous monetary policy in Brazil, but not in the Czech Republic, where both policies appear to be interrelated. Interdépendance entre politique monétaire et interventions sur le marché du change dans des régimes de ciblage d'inflation : le cas du Brésil et de la République tchèque La littérature récente sur les interventions de banques centrales sur le marché des changes a négligé l’interdépendance potentielle qui peut exister entre ces opérations et la politique monétaire. Pourtant, la question de l’interdépendance se pose même lorsque les économies adoptent un ciblage inflation, en particulier pour les pays émergeants, car les banques centrales se réservent, en général, ouvertement le droit d’intervenir pour calmer les désordres de marché, accumuler des réserves, ou réajuster le niveau du taux de change lorsque celui-ci ne semble pas en phase avec les fondamentaux. Cet article utilise un modèle de friction afin d’estimer une fonction de réaction sur le marché du change et les effets marginaux qui y sont associés pour le Brésil et la République Tchèque, à partir du moment où ces deux pays ont adopté un ciblage d’inflation (i.e., respectivement 1999 et 1998). Les principaux résultats sont que : i) les interventions visent principalement à réduire la volatilité du taux de change dans les deux pays, toutefois, la Banque centrale brésilienne réagit également aux déviations du taux de change par rapport à la tendance de moyen terme ; ii) il y a une forte asymétrie dans le comportement des banques centrales : les interventions sont plus importantes et plus probables lorsque la banque centrale doit déprécier plutôt qu’apprécier sa monnaie ; enfin iii) la politique d’interventions semble être indépendante de la politique monétaire pour le Brésil, alors qu’elles sont liées dans le cas de la République tchèque.

Suggested Citation

  • Luiz de Mello & Diego Moccero & Jean-Yves Gnabo, 2008. "Interdependencies between Monetary policy and Foreign-Exchange Intervention under Inflation Targeting: The Case of Brazil and the Czech Republic," OECD Economics Department Working Papers 593, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:593-en

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    References listed on IDEAS

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    Cited by:

    1. Catalán-Herrera, Juan, 2016. "Foreign exchange market interventions under inflation targeting: The case of Guatemala," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 42(C), pages 101-114.

    More about this item


    Brazil; Brésil; ciblage de l’inflation; Czech Republic; friction model; inflation targeting; intervention; intervention; modèle de friction; monetary policy; politique monétaire; République tchèque;

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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