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Central bank securities and foreign exchange market intervention in a developing economy

Eli Direye and Tarron Khemraj

Review of Development Economics, 2022, vol. 26, issue 1, 280-297

Abstract: The Bank of Papua New Guinea has maintained an active policy of foreign exchange (FX) market intervention. This monetary tool is associated with a depreciating currency and a worsening shortage of foreign currencies in the domestic market, suggesting that at most the policy instrument leans against existing FX‐market pressure. However, the one‐sided sales of central bank securities (or bills) engender an appreciation of the rate and an easing of the shortage in the domestic FX market. Supported by empirical evidence, we demonstrate that the one‐sided sales of central bank bills perform like an instrument of monetary policy for FX‐market stability in the presence of persistent nonremunerated excess bank reserves.

Date: 2022
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