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

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

January 17, 2020

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David J Hofman, Marcos d Chamon, Pragyan Deb, Thomas Harjes, Umang Rawat, and Itaru Yamamoto. Intervention Under Inflation Targeting--When Could It Make Sense?, (USA: International Monetary Fund, 2020) accessed November 21, 2024

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.

Subject: Banking, Currency markets, Exchange rate flexibility, Exchange rates, Financial markets, Foreign exchange, Inflation, Inflation targeting, Monetary policy, Prices

Keywords: Bank FXI, Capital flows, Central bank intervention, Currency markets, EME inflation targeters, Emerging market, Emerging markets, Exchange rate flexibility, Exchange rate volatility, Exchange rates, Foreign exchange intervention, FX intervention, FX market intervention, Global, Inflation, Inflation credibility concern, Inflation expectation, Inflation targeting, Inflation-targeting Asian EMEs, Intervention rule, Intervention strategy, IT literature, Managed exchange rate regime, Market condition, Monetary and exchange rate policies, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/009
Stock No:

WPIEA2020009
ISBN:

9781513526027
ISSN:

1018-5941

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