Patterns of Foreign Exchange Intervention under Inflation Targeting

By Gustavo Adler, Kyun Suk Chang, Zijiao Wang

May 29, 2020

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Gustavo Adler, Kyun Suk Chang, and Zijiao Wang. Patterns of Foreign Exchange Intervention under Inflation Targeting, (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

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.

Subject: Exchange rate adjustments, Exchange rates, Foreign exchange, Foreign exchange intervention, Inflation, Inflation targeting, Monetary policy, Prices

Keywords: Exchange rate, Exchange rate adjustments, Exchange rates, Foreign exchange, Foreign exchange intervention, FXI proxy, Global, Inflation, Inflation expectation, Inflation objective, Inflation outcome, Inflation targeting, IT regime, Use of FXI, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/069
Stock No:

WPIEA2020069
ISBN:

9781513536453
ISSN:

1018-5941

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