Patterns of Foreign Exchange Intervention under Inflation Targeting

Gustavo Adler, Kyun Suk Chang and Zijiao Wang

No 2020/069, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; IT regime; foreign exchange; inflation targeting; foreign exchange intervention; exchange rate; inflation expectation; inflation objective; use of FXI; inflation outcome; FXI proxy; Inflation; Exchange rates; Exchange rate adjustments; Global (search for similar items in EconPapers)
Pages: 29
Date: 2020-05-29
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Citations: View citations in EconPapers (7)

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Journal Article: Patterns of foreign exchange intervention under inflation targeting (2021)
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