[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2013-011.html
   My bibliography  Save this paper

Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework

Author

Listed:
  • Mr. Jaromir Benes
  • Mr. Andrew Berg
  • Mr. Rafael A Portillo
  • David Vávra
Abstract
We study a wide range of hybrid inflation-targeting (IT) and managed exchange rate regimes, analyzing their implications for inflation, output and the exchange rate in the presence of various domestic and external shocks. To this end, we develop an open economy new-Keynesian model featuring sterilized interventions in the foreign exchange (FX) market as an additional central bank instrument operating alongside the Taylor rule, and affecting the economy through portfolio balance sheet effects in the financial sector. We find that there can be advantages to combining IT with some degree of exchange rate management via FX interventions. Unlike "pure" IT or exchange rate management via interest rates, FX interventions can help insulate the economy against certain shocks, especially shocks to international financial conditions. However, managing the exchange rate through FX interventions may also hinder necessary exchange rate adjustments, e.g., in the presence of terms of trade shocks.

Suggested Citation

  • Mr. Jaromir Benes & Mr. Andrew Berg & Mr. Rafael A Portillo & David Vávra, 2013. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," IMF Working Papers 2013/011, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2013/011
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=40237
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2005. "The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 423-438, August.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    3. repec:zbw:bofitp:2011_009 is not listed on IDEAS
    4. Calvo, Guillermo A. & Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Targeting the real exchange rate: theory and evidence," Journal of Development Economics, Elsevier, vol. 47(1), pages 97-133, June.
    5. Aart Kraay & Jaume Ventura, 2000. "Current Accounts in Debtor and Creditor Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(4), pages 1137-1166.
    6. Xavier Gabaix & Matteo Maggiori, 2015. "International Liquidity and Exchange Rate Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(3), pages 1369-1420.
    7. Adam Geršl & Tomáš Holub, 2006. "Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience," Contemporary Economic Policy, Western Economic Association International, vol. 24(4), pages 475-491, October.
    8. Nicoletta Batini & Paul Levine & Joseph Pearlman, 2007. "Monetary Rules in Emerging Economies with Financial Market Imperfections," NBER Chapters, in: International Dimensions of Monetary Policy, pages 251-311, National Bureau of Economic Research, Inc.
    9. Moron, Eduardo & Winkelried, Diego, 2005. "Monetary policy rules for financially vulnerable economies," Journal of Development Economics, Elsevier, vol. 76(1), pages 23-51, February.
    10. Lukas Menkhoff, 2010. "High‐Frequency Analysis Of Foreign Exchange Interventions: What Do We Learn?," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 85-112, February.
    11. Carlos Garcia & Jorge Restrepo & Mr. Scott Roger, 2009. "Hybrid Inflation Targeting Regimes," IMF Working Papers 2009/234, International Monetary Fund.
    12. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January.
    13. Disyatat, Piti & Galati, Gabriele, 2007. "The effectiveness of foreign exchange intervention in emerging market countries: Evidence from the Czech koruna," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 383-402, April.
    14. Fatum, Rasmus, 2015. "Foreign exchange intervention when interest rates are zero: Does the portfolio balance channel matter after all?," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 185-199.
    15. Berganza, Juan Carlos & Broto, Carmen, 2012. "Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 428-444.
    16. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
    17. Edwards, Sebastian & Vegh, Carlos A., 1997. "Banks and macroeconomic disturbances under predetermined exchange rates," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 239-278, October.
    18. Leitemo, Kai & Soderstrom, Ulf, 2005. "Simple monetary policy rules and exchange rate uncertainty," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 481-507, April.
    19. Fatum, Rasmus & Hutchison, Michael M., 2010. "Evaluating foreign exchange market intervention: Self-selection, counterfactuals and average treatment effects," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 570-584, April.
    20. John B. Taylor, 2001. "The Role of the Exchange Rate in Monetary-Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 263-267, May.
    21. Egert, Balazs, 2007. "Central bank interventions, communication and interest rate policy in emerging European economies," Journal of Comparative Economics, Elsevier, vol. 35(2), pages 387-413, June.
    22. Woodford, Michael, 2005. "Comment on: "Using a long-term interest rate as the monetary policy instrument"," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 881-887, July.
    23. Taylor, John B. (ed.), 2001. "Monetary Policy Rules," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226791258, September.
    24. Monacelli, Tommaso, 2004. "Into the Mussa puzzle: monetary policy regimes and the real exchange rate in a small open economy," Journal of International Economics, Elsevier, vol. 62(1), pages 191-217, January.
    25. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    26. Ghosh, Atish R. & Ostry, Jonathan D. & Chamon, Marcos, 2016. "Two targets, two instruments: Monetary and exchange rate policies in emerging market economies," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 172-196.
    27. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-1369, December.
    28. Carare, Alina & Stone, Mark R., 2006. "Inflation targeting regimes," European Economic Review, Elsevier, vol. 50(5), pages 1297-1315, July.
    29. repec:bla:econom:v:71:y:2004:i::p:1-11 is not listed on IDEAS
    30. Calvo, Guillermo A. & Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Targeting the real exchange rate: theory and evidence," Journal of Development Economics, Elsevier, vol. 47(1), pages 97-133, June.
    31. Mr. Jorge I Canales Kriljenko, 2003. "Foreign Exchange Intervention in Developing and Transition Economies: Results of a Survey," IMF Working Papers 2003/095, International Monetary Fund.
    32. Vladimir Klyuev & Stephen Snudden, 2011. "Effects of Fiscal Consolidation in the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(4), pages 306-326, August.
    33. Bank for International Settlements, 2005. "Foreign exchange market intervention in emerging markets: motives, techniques and implications," BIS Papers, Bank for International Settlements, number 24.
    34. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 707-734.
    35. Herman Kamil, 2008. "Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia," IMF Working Papers 2008/088, International Monetary Fund.
    36. Ho, W.-M.Wai-Ming, 2004. "The liquidity effects of foreign exchange intervention," Journal of International Economics, Elsevier, vol. 63(1), pages 179-208, May.
    37. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(4), pages 517-531.
    38. Mr. Eric Parrado, 2004. "Inflation Targeting and Exchange Rate Rules in an Open Economy," IMF Working Papers 2004/021, International Monetary Fund.
    39. Mr. Eric Parrado, 2004. "Singapore's Unique Monetary Policy: How Does it Work?," IMF Working Papers 2004/010, International Monetary Fund.
    40. Olga Loiseau-Aslanidi, 2011. "Determinants and Effectiveness of Foreign Exchange Market Intervention in Georgia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(4), pages 75-95, July.
    41. Domac, Ilker & Mendoza, Alfonso, 2004. "Is there room for foreign exchange interventions under an inflation targeting framework ? Evidence from Mexico and Turkey," Policy Research Working Paper Series 3288, The World Bank.
    42. Alice Ouyang & Ramkishen Rajan, 2011. "Reserve accumulation and monetary sterilization in Singapore and Taiwan," Applied Economics, Taylor & Francis Journals, vol. 43(16), pages 2015-2031.
    43. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    44. International Monetary Fund, 2007. "A Simple DGE Model for Inflation Targeting," IMF Working Papers 2007/197, International Monetary Fund.
    45. Buiter,Willem H. & Corsetti,Giancarlo & Pesenti,Paolo A., 2001. "Financial Markets and European Monetary Cooperation," Cambridge Books, Cambridge University Press, number 9780521794404, September.
    46. Matthew Canzoneri & Robert Cumby & Behzad Diba, 2013. "Addressing International Empirical Puzzles: the Liquidity of Bonds," Open Economies Review, Springer, vol. 24(2), pages 197-215, April.
    47. Zsolt Ersek, 2005. "Defending the strong side of the band - the Hungarian experience," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 171-76, Bank for International Settlements.
    48. Kumhof, Michael, 2010. "On the theory of sterilized foreign exchange intervention," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1403-1420, August.
    49. Rasmus Fatum & Michael M. Hutchison, 2003. "Is sterilised foreign exchange intervention effective after all? an event study approach," Economic Journal, Royal Economic Society, vol. 113(487), pages 390-411, April.
    50. Mr. Cem Karacadag & Roberto Guimarães-Filho, 2004. "The Empirics of Foreign Exchange Intervention in Emerging Markets: The Cases of Mexico and Turkey," IMF Working Papers 2004/123, International Monetary Fund.
    51. Gulcay Tuna, 2011. "The effectiveness of Central Bank intervention: evidence from Turkey," Applied Economics, Taylor & Francis Journals, vol. 43(14), pages 1801-1815.
    52. Christopher J. Neely, 2011. "A foreign exchange intervention in an era of restraint," Review, Federal Reserve Bank of St. Louis, vol. 93(Sep), pages 303-324.
    53. Jeffrey A. Clark, 1988. "Economies of scale and scope at depository financial institutions: a review of the literature," Economic Review, Federal Reserve Bank of Kansas City, vol. 73(Sep), pages 16-33.
    54. Ghosh, Atish R. & Ostry, Jonathan D. & Chamon, Marcos, 2016. "Two targets, two instruments: Monetary and exchange rate policies in emerging market economies," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 172-196.
    55. Jaromír Beneš & Jaromír Hurník & David Vávra, 2008. "Exchange Rate Management and Inflation Targeting: Modeling the Exchange Rate in Reduced-Form New Keynesian Models," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(03-04), pages 166-194, May.
    56. Obstfeld, Maurice, 1982. "Can We Sterilize? Theory and Evidence," American Economic Review, American Economic Association, vol. 72(2), pages 45-50, May.
    57. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    58. Henderson, Dale W. & Rogoff, Kenneth, 1982. "Negative net foreign asset positions and stability in a world portfolio balance model," Journal of International Economics, Elsevier, vol. 13(1-2), pages 85-104, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Brause, Alexander, 2008. "Foreign exchange interventions in emerging market countries: New lessons from Argentina," W.E.P. - Würzburg Economic Papers 79, University of Würzburg, Department of Economics.
    2. Olivier Blanchard & Gustavo Adler & Irineu de Carvalho Filho, 2015. "Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?," NBER Working Papers 21427, National Bureau of Economic Research, Inc.
    3. Lukas Menkhoff, 2013. "Foreign Exchange Intervention in Emerging Markets: A Survey of Empirical Studies," The World Economy, Wiley Blackwell, vol. 36(9), pages 1187-1208, September.
    4. Adler, Gustavo & Lisack, Noëmie & Mano, Rui C., 2019. "Unveiling the effects of foreign exchange intervention: A panel approach," Emerging Markets Review, Elsevier, vol. 40(C), pages 1-1.
    5. Carlos García & Jorge Restrepo & Scott Roger, 2009. "Hybrid Inflation Targeting Regimes," Working Papers Central Bank of Chile 533, Central Bank of Chile.
    6. Garcia, Carlos J. & Restrepo, Jorge E. & Roger, Scott, 2011. "How much should inflation targeters care about the exchange rate?," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1590-1617.
    7. Gabriela Mundaca, 2018. "Central bank interventions in a dollarized economy: managed floating versus inflation targeting," Empirical Economics, Springer, vol. 55(4), pages 1507-1535, December.
    8. Buffie, Edward F. & Airaudo, M. & Zanna, Felipe, 2018. "Inflation targeting and exchange rate management in less developed countries," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 159-184.
    9. International Monetary Fund, 2008. "Colombia: Selected Issues," IMF Staff Country Reports 2008/032, International Monetary Fund.
    10. Jeffrey Frankel, 2021. "Systematic Managed Floating," World Scientific Book Chapters, in: Steven J Davis & Edward S Robinson & Bernard Yeung (ed.), THE ASIAN MONETARY POLICY FORUM Insights for Central Banking, chapter 5, pages 160-221, World Scientific Publishing Co. Pte. Ltd..
    11. Chang, Mei-Ching & Suardi, Sandy & Chang, Yuanchen, 2017. "Foreign exchange intervention in Asian countries: What determine the odds of success during the credit crisis?," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 370-390.
    12. repec:spo:wpmain:info:hdl:2441/6kvjk9o32n8m88c6de3gc0gltj is not listed on IDEAS
    13. Ordoñez-Callamand, Daniel & Hernandez-Leal, Juan D. & Villamizar-Villegas, Mauricio, 2018. "When multiple objectives meet multiple instruments: Identifying simultaneous monetary shocks," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 78-101.
    14. Ghosh, Atish R. & Ostry, Jonathan D. & Chamon, Marcos, 2016. "Two targets, two instruments: Monetary and exchange rate policies in emerging market economies," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 172-196.
    15. Engel, Charles, 2014. "Exchange Rates and Interest Parity," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 453-522, Elsevier.
    16. Zineddine Alla & Raphael A. Espinoza & Atish R. Ghosh, 2020. "FX Intervention in the New Keynesian Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(7), pages 1755-1791, October.
    17. Carlos Garcia & Jorge Restrepo & Scott Roger, 2009. "Hybrid Inflation Targeting Regimes1," ILADES-UAH Working Papers inv226, Universidad Alberto Hurtado/School of Economics and Business.
    18. repec:hal:spmain:info:hdl:2441/6kvjk9o32n8m88c6de3gc0gltj is not listed on IDEAS
    19. Ghosh, Atish R. & Ostry, Jonathan D. & Qureshi, Mahvash S., 2018. "Taming the Tide of Capital Flows: A Policy Guide," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262037165, April.
    20. Marjan Petreski, 2009. "A Critique On Inflation Targeting," Journal Articles, Center For Economic Analyses, pages 11-24, December.
    21. Broto, Carmen, 2013. "The effectiveness of forex interventions in four Latin American countries," Emerging Markets Review, Elsevier, vol. 17(C), pages 224-240.
    22. Mr. Marco Airaudo & Mr. Edward F Buffie & Luis-Felipe Zanna, 2016. "Inflation Targeting and Exchange Rate Management In Less Developed Countries," IMF Working Papers 2016/055, International Monetary Fund.

    More about this item

    Keywords

    WP; monetary policy; managed float; exchange rate intervention; Sterilized FX interventions; emerging markets; new-Keynesian economics; exchange rate targeting; corridor simulation; interest rate rule; exchange rate corridor; interest rate instrument; exchange rate volatility; exchange rate depreciation; exchange rate market; exchange rate movement; interest rate shock; interest rate premium; Exchange rates; Exchange rate arrangements; Central bank policy rate; Real exchange rates; Global; Eastern Europe;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2013/011. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.