1. bookVolume 11 (2022): Edition 1 (January 2022)
Détails du magazine
License
Format
Magazine
eISSN
2336-9205
Première parution
11 Mar 2014
Périodicité
3 fois par an
Langues
Anglais
access type Accès libre

Central Bank Intervention in the Inflation Targeting

Publié en ligne: 18 Jan 2022
Volume & Edition: Volume 11 (2022) - Edition 1 (January 2022)
Pages: 67 - 85
Reçu: 12 Jul 2020
Accepté: 10 Jan 2021
Détails du magazine
License
Format
Magazine
eISSN
2336-9205
Première parution
11 Mar 2014
Périodicité
3 fois par an
Langues
Anglais
Abstract

This paper analyses the impact of central bank interventions in the inflation targeting regime. The results of empirical studies in this paper show if there is a shock of the exchange rate, which would lead to depreciation of the exchange rate, a central bank may decide to mush instability on the foreign exchange market with foreign exchange interventions, thereby preventing the sudden exchange rate depreciation, which would then require a smaller reaction by the interest rate. Namely, through foreign exchange interventions, the central bank greatly absorbs the depreciation shock and, consequently, inflation is lower. As a result of lower price growth, the need for a monetary policy response to an interest rate is also lower. Based on this example, we can see that central bank intervention in some cases can be very useful in order to correct disturbances in the foreign exchange market. Therefore, some central banks accumulate foreign exchange reserves at a very high level so as to have enough space for foreign exchange intervention, without the risk of falling foreign exchange reserves below the optimum level.

Keywords

JEL Classification

1. Abbuy, K.E., 2018. An Empirical Test for the Effectiveness of Central Bank Interventions in Foreign Exchange Markets: An Application to the Canadian and Swiss Central Banks. MPRA. Search in Google Scholar

2. Adler, G. and Tovar, C. E., 2011. Foreign Exchange Intervention: A Shield Against Appreciation Winds? IMF Working Paper WP/11/165.10.5089/9781462301218.001 Search in Google Scholar

3. Adler, G. and Tovar, C. E., 2014. Foreign exchange interventions and their impact on exchange rate levels. Monetaria, Centro de Estudios Monetarios Latinoamericanos. Search in Google Scholar

4. Atish, R.G., Ostry, J.D. and Chamon, M., 2014. Two Targets, Two Instruments: Monetary and Exchange Rate Policies in Emerging Market Economies. International Monetary Fund. Search in Google Scholar

5. Basu, K. and Varoudakis, A., 2013. How to move the exchange rate if you must: the diverse practice of foreign exchange intervention by central banks and a proposal for doing it better. World Bank Policy Research Working Paper 6460.10.1596/1813-9450-6460 Search in Google Scholar

6. Berganza J.C. and Broto, C., 2012. Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries. Journal of International Money & Finance.10.2139/ssrn.1808631 Search in Google Scholar

7. Blanchard, O., G. Adler and de Carvalho Filho, I., 2015. Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? NBER Working Paper 21427.10.3386/w21427 Search in Google Scholar

8. Broto, C., 2013. The effectiveness of forex interventions in four Latin American countries. Emerging Markets Review.10.2139/ssrn.2100336 Search in Google Scholar

9. Canzoneri, M. and Cumby, R., 2013. Optimal Foreign Exchange Intervention in an Inflation Targeting Regime: some cautionary tales.10.1007/s11079-013-9287-3 Search in Google Scholar

10. Cavallino, P., 2017. Capital Flows and Foreign Exchange Intervention. International Monetary Fund, mimeo. Search in Google Scholar

11. Chang, R., 2017. Foreign Exchange Intervention Redux. Rutgers University and NBER.10.3386/w24463 Search in Google Scholar

12. Cheng, A., Das, K. and Shimatani, T., 2013. Central bank intervention and exchange rate volatility: Evidence from Japan using realized volatility. Journal of Asian Economics.10.1016/j.asieco.2013.05.001 Search in Google Scholar

13. Choi, E.K. and Jin, H., 2014. Currency intervention and consumer welfare in an open economy. International Review of Economic & Finance.10.1016/j.iref.2013.04.005 Search in Google Scholar

14. Cun, W. and Li, J., 2016. Sterilized Intervention and Optimal Chinese Monetary Policy.10.2139/ssrn.2880873 Search in Google Scholar

15. Daude, C., Levy Yeyati, E. and Nagengast, A., 2014. On the effectiveness of exchange rate intervention in emerging markets. OECD Development Centre Working Paper 324. Search in Google Scholar

16. Dutt, D. 2018. The Costs of Foreign Exchange Intervention. Allied Social Science Association Conference 2018 Philadelphia, United States. Search in Google Scholar

17. Fabris, N. 2018. Challenges for Modern Monetary Policy. Journal of Central Banking Theory and Practice,7(2), pp. 5-24. Search in Google Scholar

18. Fabris, N. 2019. Cashless Society – The Future of Money or a Utopia?”, Journal of Central Banking Theory and Practice, 8 (1), pp. 53-66. Search in Google Scholar

19. Fanelli, S. and Straub, L., 2017. A Theory of Foreign Exchange Interventions. MIT.10.2139/ssrn.2846984 Search in Google Scholar

20. Fatum, R. 2015. Foreign exchange intervention when interest rates are zero: Does the portfolio balance channel matter after all? Journal of International Money and Finance, Vol. 57, Issue C.10.1016/j.jimonfin.2015.07.015 Search in Google Scholar

21. Fatum, R. & Yamamoto, Y., 2014. Large versus Small FX Interventions. Journal of Banking and Finance, Vol. 4310.1016/j.jbankfin.2014.03.015 Search in Google Scholar

22. Fatum R., Pedersen J. and Sorensen, P.N., 2013. The intraday effects of central bank intervention on exchange rate spreads. Journal of International Money and Finance.10.1016/j.jimonfin.2012.10.006 Search in Google Scholar

23. Fernandes, G., 2013. Interventions in the Brazilian Foreign Exchange Market: An Empirical Investigation of the Determinants. Itaú. Working Paper No. 9. Search in Google Scholar

24. Fratzscher, M., Gloede, O., Menkhoff, L. Sarno, L. and Stöhr, T., 2017. When is foreign exchange intervention effective? Evidence from 33 countries. German Institute for Economic Research, DIW Berlin, Discussion Papers 1518. Search in Google Scholar

25. Fry-McKibbin, R.A. and Wanaguru., S., 2013. Currency intervention: A case study of an emerging market. Journal of International Money and Finance.10.2139/ssrn.2094727 Search in Google Scholar

26. Garcia, C. J, Restrepo, J.E. and Roger, S., 2011. How much should inflation targeters care about the exchange rate? Journal of International Money and Finance 30(7), 1590-1617.10.1016/j.jimonfin.2011.06.017 Search in Google Scholar

27. Goyal A. and Arora, S., 2012. The Indian exchange rate and central bank action: An EGARCH analysis. Journal of Asian Economics.10.1016/j.asieco.2011.09.001 Search in Google Scholar

28. Guler, A. 2020. Does Monetary Policy Credibility Help in Anchoring Inflation Expectations? Evidence from Six Inflation Targeting Emerging Economies. Journal of Central Banking Theory and Practice, 10 (1), pp. 93-112. Search in Google Scholar

29. Humpage, O. F., 2013. The Limitations of Foreign-Exchange Intervention: Lessons from Switzerland. Federal Reserve Bank of Cleveland.10.26509/frbc-ec-201313 Search in Google Scholar

30. Jin, H. and Choi, E.K., 2013. Profits and losses from currency intervention. International Review of Economic & Finance.10.2139/ssrn.2382434 Search in Google Scholar

31. Katusiime, L. and Agbola, F. W., 2018. Modelling the impact of central bank intervention on exchange rate volatility under inflation targeting. Applied Economics.10.1080/00036846.2018.1450482 Search in Google Scholar

32. Krušković, B., 2014. Monetary Strategies, Exchange Rate and Foreign Exchange Reserves. Economics Faculty, University of Banja Luka. Search in Google Scholar

33. Menkhoff, L., 2012. Foreign Exchange Intervention in Emerging Markets: A Survey of Empirical Studies. Leibniz Universität Hannover Discussion Paper No.498. Search in Google Scholar

34. Montoro, C. and Ortiz, M., 2016. Foreign exchange intervention and monetary policy design: a market microstructure analysis. Central Reserve Bank of Peru, Working Paper Series. Search in Google Scholar

35. Mundaca, G., 2018. Central bank interventions in a dollarized economy: managed floating versus inflation targeting. Empirical Economics.10.1007/s00181-017-1331-5 Search in Google Scholar

36. Suardi, S. and Chang, Y., 2012. Are changes in foreign exchange reserves a good proxy for official intervention? Journal of Finance Markets, Institutions and Money.10.1016/j.intfin.2012.04.004 Search in Google Scholar

37. Trivedi, S.R. and Srinivasan, B., 2016. Impact of Central Bank Intervention in the Foreign Exchange Market: Evidence from India Using an Event Study Approach. The Economic Society of Australia, Economic Papers Vol. 35 Issue 4.10.1111/1759-3441.12148 Search in Google Scholar

38. Williams, J. C., 2014. Inflation Targeting and the Global Financial Crisis: Successes and Challenges. Federal Reserve Bank of San Francisco. Search in Google Scholar

Articles recommandés par Trend MD

Planifiez votre conférence à distance avec Sciendo