Intervention Under Inflation Targeting--When Could It Make Sense?

Author/Editor:

David J Hofman ; Marcos d Chamon ; Pragyan Deb ; Thomas Harjes ; Umang Rawat ; Itaru Yamamoto

Publication Date:

January 17, 2020

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

We investigate the motives inflation-targeting central banks in emerging markets may have for intervening in foreign exchange markets and evaluate the case for such interventions based on the existing literature. Our findings suggest that the rationale for interventions depends on initial conditions and country-specific circumstances. The case is strongest in the presence of large currency mismatches or underdeveloped markets. While interventions can have benefits in the short-term, sustained over time they could entrench unfavorable initial conditions, though more work is needed to establish this empirically. A first effort to measure the cost of interventions to the credibility of policy frameworks suggests that the negative impact may be smaller than often assumed—at least for the set of more sophisticated inflation-targeting emerging-market central banks considered here.

Series:

Working Paper No. 2020/009

Subject:

English

Publication Date:

January 17, 2020

ISBN/ISSN:

9781513526027/1018-5941

Stock No:

WPIEA2020009

Pages:

22

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