Foreign Exchange Intervention Under Policy Uncertainty

Author : Gustavo Adler,Mr.Ruy Lama,Juan Pablo Medina Guzman
Publisher : International Monetary Fund
Page : 40 pages
File Size : 51,9 Mb
Release : 2016-03-17
Category : Business & Economics
ISBN : 9781475520415

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Foreign Exchange Intervention under Policy Uncertainty by Gustavo Adler,Mr.Ruy Lama,Juan Pablo Medina Guzman Pdf

We study the use of foreign exchange (FX) intervention as an additional policy instrument in an environment with learning, where agents infer the central bank policy rules from its policy actions. Under full information, a central bank focused on stabilizing output and inflation can achieve better outcomes by using FX intervention as an additional policy tool. Under policy uncertainty, where agents perceive that monetary policy may also have exchange rate stabilization goals, the use of FX intervention entails a trade-off, reducing output volatility while increasing inflation volatility. While having an additional policy tool is always beneficial, we find that the optimal magnitude of intervention is higher in monetary policy regimes with lower uncertainty. These results indicate that the benefits of using FX intervention as an additional stabilization tool are greater in regimes where monetary policy is credibly focused on output and inflation stabilization.

Author : Juan Pablo Medina Guzman
Publisher : Unknown
Page : 40 pages
File Size : 54,5 Mb
Release : 2016
Category : Banks and banking, Central
ISBN : 1475547315

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Foreign Exchange Intervention Under Policy Uncertainty by Juan Pablo Medina Guzman Pdf

We study the use of foreign exchange (FX) intervention as an additional policy instrument in an environment with learning, where agents infer the central bank policy rules from its policy actions. Under full information, a central bank focused on stabilizing output and inflation can achieve better outcomes by using FX intervention as an additional policy tool. Under policy uncertainty, where agents perceive that monetary policy may also have exchange rate stabilization goals, the use of FX intervention entails a trade-off, reducing output volatility while increasing inflation volatility. While having an additional policy tool is always beneficial, we find that the optimal magnitude of intervention is higher in monetary policy regimes with lower uncertainty. These results indicate that the benefits of using FX intervention as an additional stabilization tool are greater in regimes where monetary policy is credibly focused on output and inflation stabilization.--Abstract.

Author : Gustavo Adler,Mr.Ruy Lama,Juan Pablo Medina Guzman
Publisher : International Monetary Fund
Page : 40 pages
File Size : 41,5 Mb
Release : 2016-03-23
Category : Business & Economics
ISBN : 9781475547238

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Foreign Exchange Intervention under Policy Uncertainty by Gustavo Adler,Mr.Ruy Lama,Juan Pablo Medina Guzman Pdf

We study the use of foreign exchange (FX) intervention as an additional policy instrument in an environment with learning, where agents infer the central bank policy rules from its policy actions. Under full information, a central bank focused on stabilizing output and inflation can achieve better outcomes by using FX intervention as an additional policy tool. Under policy uncertainty, where agents perceive that monetary policy may also have exchange rate stabilization goals, the use of FX intervention entails a trade-off, reducing output volatility while increasing inflation volatility. While having an additional policy tool is always beneficial, we find that the optimal magnitude of intervention is higher in monetary policy regimes with lower uncertainty. These results indicate that the benefits of using FX intervention as an additional stabilization tool are greater in regimes where monetary policy is credibly focused on output and inflation stabilization.

Author : Ms.Elif C Arbatli,Steven J Davis,Arata Ito,Naoko Miake,Ikuo Saito
Publisher : International Monetary Fund
Page : 48 pages
File Size : 41,7 Mb
Release : 2017-05-30
Category : Business & Economics
ISBN : 9781484300671

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Policy Uncertainty in Japan by Ms.Elif C Arbatli,Steven J Davis,Arata Ito,Naoko Miake,Ikuo Saito Pdf

We develop new economic policy uncertainty (EPU) indices for Japan from January 1987 onwards building on the approach of Baker, Bloom and Davis (2016). Each index reflects the frequency of newspaper articles that contain certain terms pertaining to the economy, policy matters and uncertainty. Our overall EPU index co-varies positively with implied volatilities for Japanese equities, exchange rates and interest rates and with a survey-based measure of political uncertainty. The EPU index rises around contested national elections and major leadership transitions in Japan, during the Asian Financial Crisis and in reaction to the Lehman Brothers failure, U.S. debt downgrade in 2011, Brexit referendum, and Japan’s recent decision to defer a consumption tax hike. Our uncertainty indices for fiscal, monetary, trade and exchange rate policy co-vary positively but also display distinct dynamics. VAR models imply that upward EPU innovations foreshadow deteriorations in Japan’s macroeconomic performance, as reflected by impulse response functions for investment, employment and output. Our study adds to evidence that credible policy plans and strong policy frameworks can favorably influence macroeconomic performance by, in part, reducing policy uncertainty.

Author : Jagdeep S. Bhandari
Publisher : MIT Press
Page : 342 pages
File Size : 41,9 Mb
Release : 1987
Category : Business & Economics
ISBN : 0262521229

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Exchange Rate Management Under Uncertainty by Jagdeep S. Bhandari Pdf

These twelve essays take up economic management under flexible exchange rates in the presence of uncertainty. Nearly all of the contributions adopt a rational expectations framework, focusing on the stochastic aspects of the assumption and exploring the variability of, for example, output and prices in relation to the variability of various external disturbances.Jagdeep Bhandari is Associate Professor of International Economics at West Virginia University.

Author : Romain Lafarguette,Mr.Romain M Veyrune
Publisher : International Monetary Fund
Page : 33 pages
File Size : 53,8 Mb
Release : 2021-02-12
Category : Business & Economics
ISBN : 9781513569406

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Foreign Exchange Intervention Rules for Central Banks: A Risk-based Framework by Romain Lafarguette,Mr.Romain M Veyrune Pdf

This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating exchange rate arrangements. The FXI rule addresses a market failure: the absence of hedging solution for tail exchange rate risk in the market (i.e. high volatility). Market impairment or overshoot of exchange rate between two equilibria could generate high volatility and threaten financial stability due to unhedged exposure to exchange rate risk in the economy. The rule uses the concept of Value at Risk (VaR) to define FXI triggers. While it provides to the market a hedge against tail risk, the rule allows the exchange rate to smoothly adjust to new equilibria. In addition, the rule is budget neutral over the medium term, encourages a prudent risk management in the market, and is more resilient to speculative attacks than other rules, such as fixed-volatility rules. The empirical methodology is backtested on Banco Mexico’s FXIs data between 2008 and 2016.

Author : Gustavo Adler,Noemie Lisack,Rui Mano
Publisher : International Monetary Fund
Page : 42 pages
File Size : 44,8 Mb
Release : 2015-06-23
Category : Business & Economics
ISBN : 9781513534602

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Unveiling the Effects of Foreign Exchange Intervention by Gustavo Adler,Noemie Lisack,Rui Mano Pdf

We study the effect of foreign exchange intervention on the exchange rate relying on an instrumental-variables panel approach. We find robust evidence that intervention affects the level of the exchange rate in an economically meaningful way. A purchase of foreign currency of 1 percentage point of GDP causes a depreciation of the nominal and real exchange rates in the ranges of [1.7-2.0] percent and [1.4-1.7] percent respectively. The effects are found to be quite persistent. The paper also explores possible asymmetric effects, and whether effectiveness depends on the depth of domestic financial markets.

Author : Banco de Pagos Internacionales (Basilea, Suiza). Departamento Monetario y Económico
Publisher : Unknown
Page : 0 pages
File Size : 45,6 Mb
Release : 2013
Category : Banks and banking, Central
ISBN : 9291319627

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Market Volatility and Foreign Exchange Intervention in EMEs by Banco de Pagos Internacionales (Basilea, Suiza). Departamento Monetario y Económico Pdf

Author : Julia Faltermeier,Mr.Ruy Lama,Juan Pablo Medina
Publisher : International Monetary Fund
Page : 36 pages
File Size : 54,8 Mb
Release : 2017-03-27
Category : Business & Economics
ISBN : 9781475589313

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Foreign Exchange Intervention and the Dutch Disease by Julia Faltermeier,Mr.Ruy Lama,Juan Pablo Medina Pdf

We study the optimal foreign exchange (FX) intervention policy in response to a positive terms of trade shock and associated Dutch disease episode in a small open economy model. We find that during a Dutch disease episode tradable production drops below the socially optimal level, resulting in lower welfare under learningby- doing (LBD) externalities. FX reserves accumulation improves welfare by preventing a large appreciation of the real exchange rate and by inducing an efficient reallocation between the tradable and non-tradable sectors. For an empirically plausible parametrization of LBD externalities, the model predicts that in response to a 10 percent increase in commodity prices FX reserves should increase by 1.5 percent of GDP. We also find that the welfare gains from optimally using FX reserves are twice as high as the gains from relying only on monetary policy. These results suggest that FX intervention is a beneficial policy to counteract the loss of competitiveness during a Dutch disease episode.

Author : Silke Fabian
Publisher : Springer Science & Business Media
Page : 175 pages
File Size : 49,7 Mb
Release : 2012-12-06
Category : Business & Economics
ISBN : 9783642500299

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Exchange Rate Management in Interdependent Economies by Silke Fabian Pdf

With the breakdown of the Bretton Woods System and the begin of floating between the major currencies, central banks have been formally freed from their obligations to defend the fixed parities of bilateral exchange rates. Nev ertheless, since then there have been countless occasions on which monetary authorities have officially intervened in the foreign exchange market. More over, numerous studies indicate that exchange rates have been much more variable than originally anticipated - in real and in nominal, as well as in short run and longer run measures (see for example Hesse and Braasch [1989] and Marston [1988]). Through the experience of high real sector costs, the topic of optimal exchange rate management soon reentered policy discussions. The term exchange rate management encompasses both the choice of ex change rate regime as well as active intervention policies within the given 1 system. Much of the recent policy discussion has focussed on the first issue, in particular proposals of how to reform the present international monetary order. And new systems such as the European Monetary System (EMS) have emerged for subgroups of countries. However, the question of finding the optimal system has not yet been resolved.

Author : Gustavo Adler,Kyun Suk Chang,Zijiao Wang
Publisher : International Monetary Fund
Page : 29 pages
File Size : 54,6 Mb
Release : 2020-05-29
Category : Business & Economics
ISBN : 9781513536453

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Patterns of Foreign Exchange Intervention under Inflation Targeting by Gustavo Adler,Kyun Suk Chang,Zijiao Wang Pdf

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.

Author : Felix Hufner
Publisher : Unknown
Page : 188 pages
File Size : 40,6 Mb
Release : 2014-01-15
Category : Electronic
ISBN : 3790826731

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Foreign Exchange Intervention As a Monetary Policy Instrument by Felix Hufner Pdf

Author : Mr. Jorge Iván Canales Kriljenko,Mr. Cem Karacadag,Roberto Pereira Guimarães
Publisher : International Monetary Fund
Page : 46 pages
File Size : 46,8 Mb
Release : 2003-07-01
Category : Business & Economics
ISBN : 9781451902259

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Official Intervention in the Foreign Exchange Market by Mr. Jorge Iván Canales Kriljenko,Mr. Cem Karacadag,Roberto Pereira Guimarães Pdf

This paper offers guidance on the operational aspects of official intervention in the foreign exchange market, particularly in developing countries with flexible exchange rate regimes. A brief survey of the literature and country experience is followed by an analysis of the objectives, timing, amount, degree of transparency, and choice of markets and counterparties in conducting intervention. The analysis highlights the difficulty of detecting exchange rate misalignments and disorderly markets, and argues in favor of parsimony in official intervention. Determining the timing and amount of intervention is a highly subjective excercise, and some degree of discretion is almost necessary, though policy rules may serve as "rules of thumb."

Author : Mr. Marco Airaudo
Publisher : International Monetary Fund
Page : 65 pages
File Size : 51,8 Mb
Release : 2016-03-08
Category : Business & Economics
ISBN : 9781475523164

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Inflation Targeting and Exchange Rate Management In Less Developed Countries by Mr. Marco Airaudo Pdf

We analyze coordination of monetary and exchange rate policy in a two-sector model of a small open economy featuring imperfect substitution between domestic and foreign financial assets. Our central finding is that management of the exchange rate greatly enhances the efficacy of inflation targeting. In a flexible exchange rate system, inflation targeting incurs a high risk of indeterminacy where macroeconomic fluctuations can be driven by self-fulfilling expectations. Moreover, small inflation shocks may escalate into much larger increases in inflation ex post. Both problems disappear when the central bank leans heavily against the wind in a managed float.

Author : Mr.Yan Carriere-Swallow,Luis I. Jacome H.,Mr.Nicolas E Magud,Alejandro M. Werner
Publisher : International Monetary Fund
Page : 43 pages
File Size : 51,6 Mb
Release : 2016-09-30
Category : Business & Economics
ISBN : 9781475543353

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Central Banking in Latin America by Mr.Yan Carriere-Swallow,Luis I. Jacome H.,Mr.Nicolas E Magud,Alejandro M. Werner Pdf

Latin America’s central banks have made substantial progress towards delivering an environment of price stability that is supportive of sustainable economic growth. We review these achievements, and discuss remaining challenges facing central banking in the region. Where inflation remains high and volatile, achieving durable price stability will require making central banks more independent. Where inflation targeting regimes are well-established, remaining challenges surround assessments of economic slack, the communication of monetary policy, and clarifying the role of the exchange rate. Finally, macroprudential policies must be coordinated with existing objectives, and care taken to preserve the primacy of price stability.