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Fear (no more) of Floating: Asset Purchases and Exchange Rate Dynamics

Yasin Mimir

Working Papers from European Stability Mechanism

Abstract: We provide a theory on currency dynamics, capital flows and conditions for emerging market economy central bank asset purchases to leave room for manoeuvre for conventional monetary policy. Local-currency asset purchases ease financial conditions and boost banks’ foreign borrowing capacity. Therefore, they curb the financial amplification of government bond sell-off shocks by mitigating private sector capital outflows and the accompanying exchange rate depreciation. The resulting limited rise in inflation reduces the pro-cyclicality of conventional monetary policy. Our framework sheds light on stable exchange rate dynamics observed after the unprecedented asset purchase announcements in emerging-market economies during the COVID-19 crisis.

Keywords: Asset purchases; exchange rate; conventional monetary policy (search for similar items in EconPapers)
JEL-codes: E62 E63 G21 (search for similar items in EconPapers)
Pages: 51
Date: 2023-05-26
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:stm:wpaper:57

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