Capital Flows and Foreign Exchange Intervention

Paolo Cavallino

American Economic Journal: Macroeconomics, 2019, vol. 11, issue 2, 127-70

Abstract: I consider a small open economy model where international financial markets are imperfect and the exchange rate is determined by capital flows. I use this framework to study the effects of portfolio flow shocks, derive the optimal foreign exchange intervention policy, and characterize its interaction with monetary policy. I derive the optimal intervention rule in closed form as a function of three implicit targets. Finally, using Swiss data, I estimate the model to quantify the inefficiencies generated by capital flow shocks and the optimal size of the intervention.

JEL-codes: E44 E52 E63 F31 F32 F33 F41 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/mac.20160065
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Citations: View citations in EconPapers (109)

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