Foreign exchange reserve accumulation in emerging markets: what are the domestic implications?

M S Mohanty and Philip Turner

BIS Quarterly Review, 2006

Abstract: This paper discusses some of the domestic implications of the recent large-scale use of foreign exchange intervention by emerging market economies to resist currency appreciation. Over the past five years, many countries have adopted an accommodating monetary policy while intervening. Despite the prolonged period of low interest rates that resulted, various other forces have kept inflation under control and so eased one policy dilemma for central banks. Nevertheless, large and prolonged reserve accumulation can still create risks other than near-term inflation. These include=high intervention costs; monetary imbalances; overheated credit and asset markets; and very liquid and perhaps distorted banking systems.

JEL-codes: E52 E58 F31 F41 (search for similar items in EconPapers)
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